Introduction

What are Global Funds?

*Brands like Apple, Netflix, Starbucks, Facebook, Intel, Adobe, Pepsico, Amazon, Loreal, Louis Vuitton, and Microsoft are ubiquitous. These companies are listed on the U.S. stock exchanges. The major indices include Nasdaq Composite, Dow Jones Industrial Average, and S&P 500. Have you ever thought of participating in the growth prospects of these companies? Mutual Funds offer an easy way to invest in these global brands through global Fund of Funds.

A Global Fund of Fund pools money from domestic investors through a Feeder Fund and channels it to the overseas mutual fund (Master) which is managed by fund managers from that country/region.

*Indicative list.

Why invest in Global Funds

Many investors tend to have a home bias i.e., they invest in companies listed in their domestic countries due to familiarity. By investing in companies listed overseas, investors benefit from diversification through companies and themes which may not be available in their domestic market

Diversification is a key tenet of asset allocation. Investing in Global Funds could help investors mitigate country-specific risk and benefit by holding a truly global portfolio of stocks that could have a low correlation with India.

No single country can outperform every year. Hence, it pays to have a diversified portfolio spanning different countries. The table below illustrates how each country has performed over the last 12 years.

For instance, in a year like 2013, while India was up by 7%, most other large markets outperformed India in the same period (except China).

Mutual Funds offer two ways to invest in global companies – active funds and passive funds. Active Funds aim to outperform (generate more return as compared to the benchmark). Conversely, Passive Funds aim to track the underlying benchmark. In other words, Passive Fund's return will be close to the benchmark, subject to tracking error.

Types of Global Funds

Global Funds offer a variety of strategies based on geographical exposure (Emerging Markets and Developed Markets). For instance, a Brazil Fund will invest only in companies listed in the Brazil stock market while an Emerging Market Fund will invest in stocks listed in countries like India, Brazil, China, South Korea, Indonesia, and Thailand, among others. A broader strategy like an Emerging Market or Developed Market gives you exposure to different countries, thereby reducing the country-specific risk. If the fund manager believes that a certain country is likely to face headwinds he/she can cut exposure to that country/stocks and rejig the portfolio where opportunities exist.

Investors would do well to choose a fund that can invest across geographies (emerging and global). Diversified global and emerging strategies have the advantage of reducing the country-specific risk and the concentration risk associated with investing in a single sector/theme. Diversified strategies allow investors to invest across market capitalization (Small Cap, Large Cap and Mid Cap companies) and different sectors in an unconstrained style.

These funds invest in a theme or sector such as Environmental, Social Governance (ESG), Gold Mining, Metal & Energy, Technology, Metaverse, Real Estate Investment Trust, Artificial Intelligence, and so on. Investing in a single sector or theme can expose investors to relatively high risk and these funds should ideally be used for tactical exposure.

• Get exposure to new age businesses which Indians are unable to get access to since our bellwether index consists of mostly financials and traditional businesses.

• Build a diversified portfolio.

How are Fund of Funds taxed?

• Capital gains arising out of investments made from April 1, 2023, are taxed (short-term and long-term capital gains) as per your slab rate. Indexation benefit is not available.

• Fund of Funds (Domestic FoF and Global FoF) are taxed like Debt Funds.

• Tax on Income Distribution Cum Capital Withdrawal (IDCW): Taxed in the hands of investors. TDS of 10% (resident investors) and 20% for non-resident investors (plus applicable surcharge and cess). Tax-credit of TDS can be claimed at the time of filing the annual return.

• No TDS is deducted if IDCW income is below Rs 5,000 in a financial year.

• Investors should seek professional advice to understand the tax implications.

What is the purpose of FOF?

Fund of Funds pools money from investors in the source fund (Feeder) which in turn invests the money in the target fund (Master). Fund of Funds can be Domestic or Global. Domestic FoFs invest in domestic equity or debt funds while Global Funds invest in funds operated in other countries.

How to choose a Global Fund?

Global Funds offer a variety of strategies and risks. So you should choose a fund that suits your risk appetite and goal. Ideally, one may consider investing in a diversified strategy that can invest across geographies (emerging and global) and market capitalisation to diversify meaningfully. So each Global Fund is different and investors should understand the investment strategy/objective of the fund.

What is the difference between a global fund and an international fund?

Securities and Exchange Board of India (SEBI) classifies these funds under Fund of Fund (Overseas). They are also known as Global Funds or International Funds.

Since it may be difficult for novice investors to track markets across the world and identify companies that may do well in different geographies, Global Funds can be a convenient way for individual investors to participate in global markets.

Investors should ideally have a five-year plus investment horizon while investing in these funds.