What is the Difference Between Domestic vs Global vs International Funds?

Investing in a mutual fund is a popular way for NRIs (Non-Resident Indians )to grow their money. However, there are so many options that it can be confusing. In India, there are three main types of mutual funds: domestic, international, and global funds. Each type has different purposes and is suitable for different goals and risk levels.

Domestic funds invest exclusively in the Indian market across various sectors, while international funds focus on companies and assets outside of India. Moreover, global funds offer a mix of investments in both domestic (Indian) and international markets.

In this blog, we will explain what domestic, international, and global funds are. Also, we will discuss their tax implications and how NRIs can choose the right one based on their needs.

What are Domestic Funds?

Domestic funds are investment funds that invest only in the assets that are located within India. These funds allocate money to domestic equities, government and corporate bonds, and money market instruments.

The returns from these funds are earned based on the economic growth and market performance. These funds are denominated in Indian rupees and are regulated by SEBI (Securities and Exchange Board of India).

What are International Funds?

International funds invest in securities from all countries except India. It offers global diversification across various developed and emerging markets. This investment strategy can help complement the domestic holdings that are typically already present in an investor's portfolio.

An investor with mainly domestic holdings can purchase an international fund to gain more return opportunities. Alternatively, when a speculator expects a rise in a specific foreign market, they may invest in an international fund.

Either an international fund can invest in solid markets of developed countries, or it might invest in emerging markets, which carry more risk and are less mature. Generally, the more the risk, the better the potential return. Since it's called international, don't assume that it invests in every country.

Carefully assess and check what a specific international fund is focusing on. Numerous international funds focus on specific areas and must be considered as country-specific or region-specific.

What are Global Funds?

Global funds invest in securities from all parts of the world, including India. It offers exposure to both developed and emerging markets while also increasing growth opportunities in your home country. The exposure level for each area is based on the goals of a specific fund.

Investors seeking to diversify against country-specific risks primarily use global funds, without excluding investments available in their home country. Such investors may have a lower-than-desired concentration of domestic investments, or they may want to mitigate the high level of sovereign risk associated with making individual foreign investments.

Global/international funds are suitable for NRIs. However, they require linking to an NRE/NRO account, mandatory KYC, and navigating FATCA/CRS compliance, which often restricts US/Canada-based NRIs from accessing some funds or requires offline processes.

What are the Main Differences Between Domestic, International, and Global Funds?

The table below lists the key differences between domestic, international, and global funds:

How to Select the Right Type for NRIs?

Consider the following factors to choose the right type of investment fund:

Check Existing Portfolio

• Reduce home bias by adding international funds, provided that most of your holdings are Indian stocks/funds.
• Do not overload on similar overseas exposure if you have already invested in global funds.

Align with Goals

• Choose domestic funds if you have short-term goals for enhanced stability.
• Consider global/international funds for long-term wealth creation goals and for global growth and diversification.

Match with Risk Appetite

• Domestic funds have lower currency risk and are ideal for conservative investors.
• Global/international funds can be suitable for long-term risk-tolerant investors as they have higher volatility and currency swings.

Awareness of Tax and Cost

• For tax purposes, global and international funds are considered debt funds in India (LTCG after three years with indexation benefits).
• Compare before investing, as expense ratios and entry/exit loads may be higher than domestic funds.

What are the Tax Implications for Domestic vs Global vs International Funds?

One key difference between domestic, international, and global funds is the tax implications. After the change made to the April 2023 tax rule, the gap has become even more essential for investors to understand. Let's understand the tax implications in detail:

Taxation of Domestic Equity Funds (Investing in Indian Stocks)

Domestic equity funds like large-cap, mid-cap, small-cap, flexi-cap, and ELSS receive favorable tax treatment in India. It means:

If you sell the units within one year, the gains will be treated as Short-Term Capital Gains (STCG), on which:

• Tax Rate = 15% on the gains.

Also, if you sell the units after one year, the gains will be treated as Long-Term Capital gains (LTCG):

• Tax Rate = 10% on gains exceeding Rs. 1 lakh per financial year.
• Gains up to Rs. 1 lakh are exempt from taxation.

Why this is beneficial: 

This is beneficial as:

• It offers reduced tax rates
• better post-tax returns
• encourages long-term equity investing in India.

Taxation of International and Global Funds (Foreign Equity Exposure)

The Indian government significantly changed the tax rules for international and global funds after April 2023. International and global funds are now treated as debt funds for taxation. They no longer enjoy long-term tax benefits in India. It means:

The gains will be taxed at your personal income tax slab rate, regardless of how long you hold them, be it 1 month or 10 years.

For example, if you fall under the 30% slab, your gains = 30% tax.

No Indexation Benefit

Earlier, investors received the benefit of indexation to lower the tax burden on long-term global fund investments. However, now the indexation benefit is removed completely.

No Special Long-Term Capital Gains Benefit

Unlike domestic equity funds, there is:

• No 10% LTCG rate
• No Rs. 1 lakh exemption.

TDS Applicability for NRIs

For Non-Resident Indians (NRIs), TDS (Tax Deducted at Source) applies when they redeem the mutual fund units.

• For domestic equity funds, TDS is deducted on capital gains at applicable rates.
• Since gains are taxed at slab rates for international and global funds, TDS is also deducted accordingly.
• NRIs have the option to adjust the deducted TDS later when filing their income tax returns (ITR). They can also claim a refund if excess tax has been deducted or if DTAA benefits apply.

Which is Ideal for NRIs?

The choice between domestic, international, and global funds depends on personal financial goals, risk tolerance, and other factors. Here is how you can choose the best one for yourself:

Domestic Funds

• It offers direct participation in India's long-term economic and corporate growth.
• Suitable for NRIs who have future financial goals in India, like retirement, purchasing a house, or family expenses.
• Regulatory framework and fund disclosures are familiar and transparent.
• Returns and investments are INR-denominated, which avoids foreign exchange conversion issues.
• The taxation structure is relatively clear and well-defined under the Indian tax laws.
• Portfolio tracking and compliance are easier compared to overseas investments.

International Funds

• It offers exposure to a particular foreign country or region, such as the U.S., Europe, or Asia-Pacific markets.
• Suitable for NRIs who understand overseas markets because of residence or work experience abroad.
• Help hedge against the depreciation of the Indian rupee using foreign currency exposure.
• Minimized dependence on the Indian market performance via geographical diversification.
• Ideal for an investor having a strong conviction in a specific global economy.
• Permits NRIs to invest in global leaders, multinational companies, and advanced sectors, such as technology and healthcare.

Global Funds

• Invest across multiple countries, both developed and emerging markets, using a single fund.
• Ideal for NRIs who seek international exposure without managing multiple country-specific funds.
• Suitable for long-term wealth creation with a globally diversified approach.
• Offers broader diversification, which reduces country-specific and regional risks.
• It balances exposure across different currencies, industries, and economic cycles.
• Aids in stabilizing portfolios during downturns in any single market or economy.

Final Thoughts

Choosing the right type of investment fund is important for anyone wanting to grow their money, particularly NRIs who face unique challenges like exchange rates and regulations. You can make a smart choice that aligns with your financial goals by learning about domestic, international, and global funds. Additionally, seeking help from an expert at Savetaxs can help you navigate the investment world easily.

At Savetaxs, we have a team of experts who can solve all your queries related to investment. Our team can help you make a decision that best matches your financial goals. Contact us anytime, as we are working 24*7 across all time zones, so that you stay stress-free while working towards achieving long-term wealth.