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Some international mutual funds that invest in the developed markets, including the US market, have delivered returns better than Indian equities over the past two to three years. As a result, many people are now looking to invest in them. Most of these international funds are fund of funds (FoFs), which invest in the units of foreign funds, which in turn invest in the stocks of foreign companies. FoFs invest in other schemes and not in stocks directly. Investing in international mutual funds can ensure geographical diversification in a portfolio.

If you are investing or planning to invest in these funds, it is important to understand how these funds are taxed so that you can calculate the potential post-tax returns. These funds are treated like debt funds as far as taxation is concerned. The gains for a holding period of less than three years are treated as short-term capital gains. They are added to the income of the investors and are taxed at the slab rate. The gains over a holding period of more than three years are treated as long-term gains and are taxed at the rate of 20% post indexation.

Apart from taxation, the currency movement affects the returns of international funds. They benefit from rupee depreciation as their gains in rupees terms go up and are negatively impacted by rupee appreciation.

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