Tax break to attract more investors to foreign equity funds

Local investors can enjoy the tax benefits of investing in foreign equity funds starting Feb. 29.

The government has exempted taxes on returns from foreign equity funds that invest more than 60 percent into stocks listed on overseas markets.

From later this month, subscribers to the funds will be subject to the tax exemption for the next 10 years. Exchange-traded funds (ETF) that are listed on the local stock market are also subject to the tax exemption if they invest more than 60 percent in overseas equities. The subscription limit is 30 million won ($24,000) per person.

According to data by Statistics Korea, the average financial assets of Korean households stood at 89.31 million won in 2014. The median number was 45.6 million won.

Because of the low interest rate policy this year and negative forecasts about local businesses’ profitability amid a global slowdown, foreign equities are more attractive.

From 2007 to 2009, the government used to exempt a 15.4 percent tax on dividends from foreign equity funds as part of tax breaks on financial assets. This year, the 15.4 percent tax will be maintained, while all returns from overseas investments, including foreign exchange arbitrages, will be exempt from the tax.

Investors who want to take advantage of the tax benefit need to wait until Feb. 29, as it is impossible to switch funds subscribed before the date into tax-exempt funds.

Before making investments in the funds, investors are advised to learn about global economic trends and choose a certain region.

Local securities brokerages and asset management firms suggest some tips to help investors improve the probability of winning higher yields from foreign equity funds.

First, diversify regions. Investors need to be aware of the fact that many investors across the globe faced huge losses as they over-invested in emerging markets in 2008. Since then, they have learned the lesson of the diversification principle, and investments in advanced markets in proportion to emerging markets grew from 11.6 percent to 39.4 percent as of Feb. 11, 2016, according to data from Hyundai Securities.

Still, some investors are overly focusing on certain countries such as China. As the recent Chinese financial market jitters showed, it is quite risky to put all your eggs in one basket.

Second, pick regions with positive outlooks for long-term growth. It is natural that investors would want to go for countries that have high prospects of growth in the near term, like emerging countries. But those markets showed plunges of around 20 percent early this year due to greater volatility in the face of tapering by the U.S. Federal Reserve. Since a year’s direction of stock markets is usually determined in the beginning of the year, investors would be better off refraining from pinning high hopes on those markets. Again, diversifying investments will avoid risks with individual countries.

“There is no need to invest a lump sum of money initially,” said Oh On-soo, researcher at Hyundai Securities. “Once subscribed, the tax exemption benefit will last for 10 years. Invest affordable amounts on a regular basis in the long run.”

To raise the amount of yields, it will be helpful to check the past performance of securities brokerage firms or asset management firms.

Investing in foreign equity funds involves larger costs than local funds. So if the costs are burdensome for the 10-year period, it is a good idea to select local exchange-traded funds whose portfolio consists of over 60 percent of foreign equities.

BY SONG SU-HYUN, LEE SEUNG-HO [song.suhyun@joongang.co.kr]