International mutual funds: Should you invest before March 31 to get tax benefit?

With the new mutual fund taxation rules kicking in from April 01, some fund houses have allowed investors to resume investments in select international funds.

Asset managers such as Edelweiss, Mirae and Franklin have announced that some of their international funds are open for subscriptions, till they breach the overseas investment limit. The opening of such international funds comes at a time when global stock markets are going through a correction phase. For instance, the Nasdaq 100 index is down nearly 15 per cent in the last one year, compared to less than 2 per cent for domestic benchmark BSE Sensex.

As you may be aware, from April 1, 2023, investors buying mutual funds with less than 35 per cent domestic equity exposure and holding them for over 3 years will no longer enjoy long-term capital gains treatment with indexation benefits. This affects a host of funds, including international funds. So, gains in such funds will be taxed at your slab/marginal rate, and irrespective of period of holding, gains will be treated as short-term gains. This impacts any new investment from April 1 as one may not get benefits of the old tax regime.

So, should you use this opportunity to invest in international funds? Let us find out.

Funds open the gates

Edelweiss Mutual Fund has opened up seven international funds for lump sum subscription and switch-in transactions. These are Edelweiss ASEAN Equity, Greater China Equity, US Technology Equity, Emerging Markets Opportunities, Europe Dynamic Equity, US Value Equity, and MSCI India Domestic & World Healthcare 45.

Key things to know about Annual Information Statement before filing your tax returns  Key things to know about Annual Information Statement before filing your tax returns  

Mirae Asset Mutual Fund has allowed lump sum and switch-in transactions with no upper limit in its NYSE FANG+ ETF FoF, S&P 500 Top 50 ETF FoF, and Hang Seng TECH ETF FoF. In these 3 schemes, existing registered SIPs/Systematic Transfer Plans (STPs) are allowed with effect from March 29, 2023. However, fresh SIP/STP registrations are not allowed. Besides, direct applications received in creation unit size will be allowed in NYSE FANG+ ETF, S&P 500 Top 50 ETF and Hang Seng TECH ETF.

Also read: Smarter tax options for self-employed

Franklin is allowing lump sum subscriptions or switch-in, in Franklin India Asian Equity, Franklin India Feeder-Franklin US Opportunities and Franklin India Feeder-Templeton European Opportunities. Do note that fresh registration under Transfer of Income Distribution Cum Capital Withdrawal Plan (TIDCW)/ Daily and Weekly frequency under Systematic Transfer Plans (STP) for investing into any of the designated schemes remains suspended. Do remember that this is not an exhaustive list.

Subscription window

SEBI in June 2022 had permitted the AMCs to resume subscription and make investments in overseas funds/securities up to the headroom available without breaching the overseas investment limit (as of February 1, 2022). Many AMCs used such windows to mop up flows and closed the funds for further subscriptions when limits were hit or were close to being hit. Hence, do remember that fund houses may suspend the subscriptions when investments come close to the permissible limit.

Tax benefit incidental

One should remember that investing for tax advantages alone can result in sub-optimal returns. While the motivation for different fund-houses to solicit flows from investors can be due to business reasons, the same are not applicable for you as an investor. Tax benefits are applicable on capital gain i.e. profit, which ultimately depends on entry and exit prices.

Focus on geography

The three broad categories of international funds recently opened up falls under US, Europe and Asia/EM markets.

As for the US, economic situation especially in the backdrop of banking problems (SVB and Signature Bank) needs a close watch. Decline in retail sales and industrial production remind us that the economy has been slowing. The sharp hike in interest rates, aimed to cool down inflation, will leave a long-lasting impact. In this scenario, the US market may not be a favourable destination for one-time strategic investments. It is better to look at pockets where correction has made valuations cheaper.

Also read: Gap between old and new tax regime narrows

In the Europe, the Credit Suisse episode has stoked fresh concerns about the health of seemingly strong and old institutions. Inflation and flagging growth remain a problem in this region too.

Emerging markets are showing opportunities, but they are not as good as what India offers. Geographical diversification outside home country, unless backed by very strong reasons and fundamentals, is not recommended.

Prefer NASDAQ funds

In the broader international fund universe, we recommend NASDAQ funds due to the below given four reasons.

One, the underlying stocks of the index offer unique business models and are owners of advanced technologies.

Two, many of these companies are commercialising emerging themes for this decade, and offer solid monetisation opportunities.

Also read: Taking up a side gig? Here’s how your income will be taxed

Three, NASDAQ 100, despite having the perception of a tech basket, is reasonably diversified with exposure to segments such as consumer discretionary, communication, consumer staples, healthcare, and industrial utilities.

Four, from a geographical perspective, NASDAQ 100 companies derive bulk of their revenue from different countries, cutting concentration risk.

We at bl.portfolio recommended buying NASDAQ funds in October 2022 when the index was near 10,700 levels. It has now risen to 12,800, which is a 20 per cent rise. The index is trading in-line with its 5-year average price-to-earnings (PE) valuation multiple (28 times) and at a premium to 10-year average PE multiple (25 times).

In the Indian MF landscape, there are more than half a dozen schemes that offer NASDAQ exposure. This list includes Invesco EQQQ NASDAQ 100 ETF FoF, Navi NASDAQ 100 FoF. Axis NASDAQ 100 100 FoF, Kotak Nasdaq 100 FoF, Motilal Oswal NASDAQ 100 ETF, Motilal Oswal Nasdaq 100 FoF, ABSL NASDAQ 100 FoF and ICICI Pru NASDAQ 100 Index Fund. However, one has check with the fund-houses to know which schemes are still open for subscription.

Risk to consider, no to FOMO

The case for downside exists if interest rates in the US firm up and start impacting the economic growth. An ordinary US investor can lower his/her average cost by doing a lumpsum or systematic investment when markets are going through a correction phase. On the other hand, an Indian mutual fund investor may not be able to do as per his/her liking due to the overseas investment limits set by SEBI and the fund-houses’ control on the fund flows.

The AMCs have a right to suspend subscriptions in aforementioned schemes in accordance with the provisions. However, the units of NASDAQ ETFs may continue to trade on the stock exchanges and can be available on tap during market hours as long as authorised participants ensure liquidity.

Also read: Should investors opt for tax saving FDs?

While global equities present an opportunity for investors, rushing to invest in such schemes solely to benefit from taxation is not recommended.

Take investment decisions based on the fundamentals, not due to incidental factors. Resist the impulse to allocate money to international funds if it is not part of your long-term investment plan. Avoid making investment decisions based on a single factor, as this can be a symptom of FOMO-driven behaviour.

COMMENT NOW