Your Queries (Mutual Funds): Global funds offer a hedge against currency depreciation

How can I invest in mutual funds which invest in global funds and what are the factors should I keep in mind?
—Rajesh Khujuria
International funds provide an opportunity to diversify your portfolio across geographies giving exposure to varied economic growth drivers. There are two sources of portfolio returns viz. asset-based return and currency return. These funds also gain if the Indian Rupee depreciates against the currency in which the underlying assets are denominated. International funds should form an integral part of your portfolio allocation, as they offer a hedge against currency depreciation. Exposure to international funds could be about 5-25% of your portfolio depending upon your time horizon and risk suitability.

For Indian investors, there are plenty of options available offering exposure to regions such as the U.S., Europe, Asia, Japan, China, etc. Some funds invest directly into securities of the respective regions, while some are feeder funds which in turn invest in the internationally domiciled parent through the fund-of-fund (F-o-F) route. Other funds offered are those investing in commodities, mining, agriculture, etc. Some follow a passive investment strategy, wherein they track a particular global index.

Check prevailing valuations of the underlying regions that the fund invests in. When investing in feeder funds check the expense of the underlying parent fund. International funds (even though equity-based) are taxed like fixed-income funds, i.e. the long-term gains (holding period of more than three years) are taxed at 20% post-indexation of costs for and at marginal tax rate for short-term gains.

Is SIP in MF with growth option better than dividend payout option?
—Geetha Narayanan
Dividend options are used by investors seeking a regular income from their investments. Mutual funds pay dividends out of any investible surplus, which are in essence a return of your capital invested. This return of capital defeats the purpose of investing. Thus the investor loses out on any subsequent gains that he would have made on the dividends received till the end of his investment horizon. Dividends received are currently taxable in the hands of investors at their marginal rate of tax. Hence, the growth option is better than the dividend payout option.

The writer is director, Investment Advisory, Morningstar Investment Adviser (India). Send your queries to [email protected]