Looking to invest in MFs? Try tax-efficient mixed Indo-global funds

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With the trailing returns of several equity fund categories turning negative, Indian investors are currently looking at ways to cushion the decline in their portfolios. One way they can do so is by taking exposure to international funds. However, they need to weigh the pros and cons of investing in mixed Indian-global funds (which invest partly in Indian equities and partly in foreign equities) vis-a-vis pure international funds.

Diversification and the ability to reduce country-specific risk is the key reason one should invest in foreign equities. “Currently Indian investors are worried about the impact the IL&FS imbroglio will have on the markets. But the US market is completely unaffected by these events and is, in fact, doing quite well,” says Rajeev Thakkar, chief investment officer, PPFAS Mutual Fund. Adds Kaustubh Belapurkar, director-manager research, Morningstar Investment Adviser India: “For the same level of return, you can reduce portfolio volatility significantly with a 10-15 per cent exposure to international funds.”

Investing in foreign equities also provides access to themes and sectors not available in India. “New technologies, e-commerce, etc can only be accessed through foreign equities. US and China are the major players giving rise to new business models and technologies,” says Jinesh Gopani, head-equity, Axis Mutual Fund. Axis has just launched Axis Growth Opportunities Fund, which will invest 30-35 per cent in foreign equities, and the balance in Indian equities.

Funds that invest both in Indian and foreign equities include Axis’s newly launched fund, PPFAS Long Term Equity Fund, and so on. “A fund like ours is more tax-efficient compared to a pure international fund,” says Thakkar. Since these Indian-global funds usually take 65 per cent exposure to Indian equities, they are taxed at par with domestic equity funds. They become eligible for long-term capital gain after one year. The first Rs 100,000 of long-term capital gain is not taxed. Any gain above that is taxed at 10 per cent.


Pure global funds too have certain advantages. These funds are geography-specific (US, Europe, China, etc) or they are globally diversified. If investors want exposure to a particular geography, they can do so through these funds. Where the Indian-global funds invest depends on the fund manager’s discretion.

Pure international funds’ drawback is that they are treated at par with debt funds for tax purposes. Capital gains become long-term only after three years. They are not eligible for the Rs 100,000 tax exemption. Long-term gains are taxed at 20 per cent with indexation. However, if you hold them for more than three years, the effective tax rate can decline to below 10 per cent. “The tax arbitrage between the two types of funds has reduced,” says Belapurkar.

If you decide to opt for an Indian-global fund, check equity-debt allocation to ensure it will get favourable tax treatment. Also, check the fund’s mandate: If the fund manager is allowed to reduce foreign equity allocation to a low level, you will not get adequate exposure to international stocks. Evaluate the fund house’s expertise in managing domestic equities (since the major part of the fund will be invested in India) and the research tie-up it has for investing in foreign equities. Finally, in the case of older funds, look up the track record.


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