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Why Invest abroad?
You should invest in international funds primarily to diversify your portfolio geographically. Different stock markets do well in different years. The Indian market may be outperforming this year, but it will not do so every year. By being internationally diversified, you can protect your portfolio from being hit too hard when your home market underperforms.
Another advantage is that you can guard your portfolio against currency depreciation. Since India is a high inflation country, its currency tends to depreciate against the currencies of low-inflation countries. Meanwhile, many of your future goals--such as children's higher education and foreign travel--could involve spending in the currencies of one of the low-inflation economies of the developed world. A hedge against home currency depreciation is an outcome that can be derived from international investing.
Investing in foreign markets also gives you the advantage of capitalising on growth beyond your borders.You can get exposure to sectors that are not present in India or have only a minuscule presence, such as aeronautics, defence equipment suppliers, and so on.
Depending on your risk appetite, you may invest 1015% of your equity portfolio in international funds.
Building the portfolio
First invest in a diversified fund and only then move to country-specific funds. Alternatively, you may diversify across geographies one after the other. In the latter case, first invest in the developed world, whose markets have a low correlation with the Indian market. The first country should preferably be the US, which is the world's largest stock market and is home to the highest number of the world's largest MNCs. Do not start by investing in the fund of a small, emerging market.
Build an adequately diversified equity portfolio within the domestic market first before foraying into international equities.
Finally, While selecting an international fund, pay attention to its track record, pedigree of the fund house, and the fund management team's level of experience.
The decision to invest internationally should be on the basis of a long-term asset allocation. It should not be a short-term, tactical decision meant to take advantage of outperformance in a particular market or the movement of a particular currency. If you engage in such market timing, you may incur losses.
Do not pull out entirely from a geography that is doing poorly. European funds have not done well over the past year. Nonetheless, don't exit them. Give any equity investment at least 5-7 years. Also, the leading companies in most geographies today are multinationals that derive a large part of their revenue from outside their home. So the European economy doing badly may not translate into Europe-domiciled MNCs also underperforming.
Finally, international funds that have less than 65% invested in Indian equities are taxed at par with debt funds. Don't let this deter you from investing in them. You do invest in debt funds and gold even though their tax treatment is less favourable than that of equities because you wish to diversify your portfolio. The same logic applies to international funds
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