Foreign mutual funds or international ETFs: Which is better?
What's the story
Indian investors are increasingly looking at global markets to diversify their portfolios. Two popular options are foreign mutual funds and international ETFs. Both have their own benefits and drawbacks, making it important for investors to know which suits their investment goals better. Here's an article that compares the two, based on factors such as cost, liquidity, tax implications, and management style.
#1
Understanding foreign mutual funds
Foreign mutual funds are investment vehicles that pool money from several investors to invest in global markets. Managed by professional fund managers, these funds aim to achieve specific investment objectives. They usually come with higher fees due to active management and research costs. Investors can benefit from exposure to international equities, bonds, and other asset classes not available in domestic markets.
#2
Exploring international ETFs
International ETFs (Exchange-Traded Funds) track the performance of specific indices or sectors outside India. They trade on stock exchanges like regular shares, offering liquidity throughout the trading day. International ETFs generally have lower expense ratios than mutual funds because of passive management strategies. They offer diversification across different geographies and industries, with the flexibility of buying/selling anytime during market hours.
#3
Cost considerations for investors
Cost is an important factor when choosing between foreign mutual funds and international ETFs. Foreign mutual funds usually charge higher management fees due to active portfolio management. International ETFs, on the other hand, have lower expense ratios as they passively track indices. However, investors must also consider brokerage fees when trading ETFs, which may eat into returns if traded frequently.
Tip 1
Tax implications for Indian investors
Taxation on foreign investments varies based on the type of fund chosen by the investor. Gains from foreign mutual funds are taxed according to short-term capital gains (STCG) or long-term capital gains (LTCG) rules, depending on the holding period. International ETF gains are also subject to similar taxation but may differ based on the jurisdiction of the underlying assets.