PROSPECTUS FRANKLIN INDIA GROWTH FUND Franklin Templeton International Trust March 1, 2018 Class A Class C Class R6 Advisor Class FINGX FINDX FIGEX FIGZX The U.S. Securities and Exchange Commission (SEC) has not approved or disapproved these securities or passed upon the adequacy of this prospectus. Any representation to the contrary is a criminal offense. 141 P 03/18
Contents Fund Summary Information about the Fund you should know before investing Investment Goal... 2 Fees and Expenses of the Fund.... 2 Portfolio Turnover... 4 Principal Investment Strategies... 4 Principal Risks... 5 Performance... 8 Investment Manager.... 10 Sub-Advisor... 10 Portfolio Managers... 10 Purchase and Sale of Fund Shares... 10 Taxes... 11 Payments to Broker-Dealers and Other Financial Intermediaries... 11 Fund Details More information on investment policies, practices and risks/financial highlights Investment Goal... 12 Principal Investment Policies and Practices... 12 Principal Risks... 14 Management.... 22 Distributions and Taxes... 24 Financial Highlights... 28 Your Account Information about sales charges, qualified investors, account transactions and services Choosing a Share Class.... 33 Buying Shares... 43 Investor Services... 46 Selling Shares... 49 Exchanging Shares... 52 Account Policies... 56 Questions... 67 For More Information Where to learn more about the Fund Back Cover
FUND SUMMARY FUND SUMMARY Fund Summary Investment Goal Long-term capital appreciation. Fees and Expenses of the Fund These tables describe the fees and expenses that you may pay if you buy and hold shares of the Fund. You may qualify for sales charge discounts in Class A if you and your family invest, or agree to invest in the future, at least $50,000 in Franklin Templeton funds. More information about these and other discounts is available from your financial professional and under Your Account on page 33 in the Fund s Prospectus and under Buying and Selling Shares on page 49 of the Fund s Statement of Additional Information. In addition, more information about sales charge discounts and waivers for purchases of shares through specific financial intermediaries is set forth in Appendix A - Intermediary Sales Charge Discounts and Waivers to the Fund s prospectus. Please note that the tables and examples below do not reflect any transaction fees that may be charged by financial intermediaries, or commissions that a shareholder may be required to pay directly to its financial intermediary when buying or selling Class R6 and Advisor Class shares. Shareholder Fees (fees paid directly from your investment) Class A Class C Class R6 Advisor Class Maximum Sales Charge (Load) Imposed on Purchases (as percentage of offering price) 5.75% None None None Maximum Deferred Sales Charge (Load) (as percentage of the lower of original purchase price or sale proceeds) None 1 1.00% None None 1. There is a 1% contingent deferred sales charge that applies to investments of $1 million or more (see Investments of $1 Million or More under Choosing a Share Class ) and purchases by certain retirement plans without an initial sales charge that are sold within 18 months of purchase. Annual Fund Operating Expenses (expenses that you pay each year as a percentage of the value of your investment) Class A Class C Class R6 Advisor Class Management fees 1.30% 1.30% 1.30% 1.30% Distribution and service (12b 1) fees 0.25% 1.00% None None Other expenses 1 0.55% 0.55% 0.38% 0.55% Total annual Fund operating expenses 1 2.10% 2.85% 1.68% 1.85% Fee waiver and/or expense reimbursement 2-0.45% -0.45% -0.45% -0.45% Total annual Fund operating expenses after fee waiver and/or expense reimbursement 1,2 1.65% 2.40% 1.23% 1.40% 1. Other expenses of the Fund have been restated to exclude non-recurring prior period expenses and for Class R6 shares, to reflect current fiscal year expenses. If non-recurring prior period expenses were included in the table above, the amounts stated would have been greater. Consequently, the total annual Fund operating expenses differ from the ratio of expenses to average net assets shown in the Financial Highlights. 2. Management has contractually agreed to waive or assume certain expenses so that total annual Fund operating expenses (excluding Rule 12b 1 fees, and certain non-routine expenses) for each class of the Fund do not exceed 1.40% until February 28, 2019. Contractual fee waiver and/or expense reimbursement agreements may not be changed or terminated during the time periods set forth above. Example This Example is intended to help you compare the cost of investing in the Fund with the cost of investing in other mutual funds. The Example assumes that you invest $10,000 in the Fund for the time periods indicated and then redeem all of your shares at the end of the period. The Example also assumes that your investment has a 5% return each year and that the Fund s operating expenses remain the same. The Example reflects adjustments made to the Fund s operating expenses due to the fee waivers and/or expense reimbursements by management for the 1 Year numbers only. Although your actual costs may be higher or lower, based on these assumptions your costs would be: 1 Year 3 Years 5 Years 10 Years Class A $733 $1,154 $1,600 $2,833 Class C $343 $841 $1,464 $3,144 Class R6 $125 $486 $870 $1,949 Advisor Class $143 $538 $959 $2,132 If you do not sell your shares: Class C $243 $841 $1,464 $3,144 2 Prospectus franklintempleton.com franklintempleton.com Prospectus 3
FUND SUMMARY FUND SUMMARY Portfolio Turnover The Fund pays transaction costs, such as commissions, when it buys and sells securities (or turns over its portfolio). A higher portfolio turnover rate may indicate higher transaction costs and may result in higher taxes when Fund shares are held in a taxable account. These costs, which are not reflected in annual Fund operating expenses or in the Example, affect the Fund s performance. During the most recent fiscal year, the Fund s portfolio turnover rate was 39.65% of the average value of its portfolio. Principal Investment Strategies Under normal market conditions, the Fund invests at least 80% of its net assets in securities of Indian companies. The Fund invests primarily in the equity securities of Indian companies, which are those that: are organized under the laws of, or with a principal office in, or for which the principal trading market for their securities is, India; or derive 50% or more of their total revenue or profit from either goods or services produced or sales made in India; or have 50% or more of their assets in India. The Fund may invest in companies of any size, and may invest a significant portion of its assets in securities of smaller companies. The Fund invests primarily in common stocks. Although the Fund generally seeks investments across a number of sectors, from time to time, based on economic conditions, the Fund may have significant positions in particular sectors. The Fund currently intends to invest primarily in the securities of Indian companies by investing in shares of a whollyowned, collective investment vehicle (the Portfolio ), registered with and regulated by the Mauritius Financial Services Commission. The Portfolio historically sought to maintain residency in Mauritius to avail itself of a beneficial tax treaty between Mauritius and India. The treaty has since been amended and may no longer provide beneficial tax treatment for the Fund. See Investments through Mauritius in the Fund s prospectus for more information. Unless the context otherwise requires, descriptions in this prospectus of securities and transactions, and their associated risks, refer to Fund investments made directly or indirectly through the Portfolio. In addition to the Fund s main investments, the Fund may invest up to 20% of its net assets in securities that do not qualify as Indian company securities. When consistent with the Fund s investment goal, up to 20% of the Fund s net assets may be invested in debt obligations, including debt obligations of Indian companies, which may be lower-rated or unrated. The investment manager is a research driven, fundamental investor, pursuing a growth strategy for the Fund. As a bottom-up investor focusing primarily on individual securities, the investment manager looks for companies whose current market price does not, in the investment manager s opinion, reflect the company s future growth prospects. The investment manager chooses companies that have identifiable drivers of future earnings growth and present, in the investment manager s opinion, the best trade-off between that potential earnings growth, business and financial risk, and valuation. Principal Risks You could lose money by investing in the Fund. Mutual fund shares are not deposits or obligations of, or guaranteed or endorsed by, any bank, and are not insured by the Federal Deposit Insurance Corporation, the Federal Reserve Board, or any other agency of the U.S. government. Market The market values of securities or other investments owned by the Fund will go up or down, sometimes rapidly or unpredictably. The market value of a security or other investment may be reduced by market activity or other results of supply and demand unrelated to the issuer. This is a basic risk associated with all investments. When there are more sellers than buyers, prices tend to fall. Likewise, when there are more buyers than sellers, prices tend to rise. Stock prices tend to go up and down more dramatically than those of debt securities. A slower-growth or recessionary economic environment could have an adverse effect on the prices of the various stocks held by the Fund. Foreign Securities (non U.S.) Investing in foreign securities typically involves more risks than investing in U.S. securities, and includes risks associated with: (i) internal and external political and economic developments e.g., the political, economic and social policies and structures of some foreign countries may be less stable and more volatile than those in the U.S. or some foreign countries may be subject to trading restrictions or economic sanctions; (ii) trading practices e.g., government supervision and regulation of foreign securities and currency markets, trading systems and brokers may be less than in the U.S.; (iii) availability of information e.g., foreign issuers may not be subject to the same disclosure, accounting and financial reporting standards and practices as U.S. issuers; (iv) limited markets e.g., the securities of certain foreign issuers may be less liquid (harder to sell) and more volatile; and (v) currency exchange rate fluctuations and policies. The risks of foreign investments may be greater in developing or emerging market countries. 4 Prospectus franklintempleton.com franklintempleton.com Prospectus 5
FUND SUMMARY FUND SUMMARY Investment through Mauritius The Fund currently intends to invest indirectly in securities of Indian companies through the Portfolio, an entity formed in the Republic of Mauritius. The Fund and the Portfolio rely on the income tax treaty between India and Mauritius (the Treaty ) for relief from certain Indian taxes. Treaty renegotiation, legislative changes or changes in the requirements to establish residency in Mauritius are expected to result in higher taxes and lower returns for the Fund and may affect the Fund s ability to achieve its investment goal. Other future changes to the Treaty or additional legislative changes may also affect the Fund s returns. Developing Market Countries The Fund s investments in securities of issuers in developing market countries are subject to all of the risks of foreign investing generally, and have additional heightened risks due to a lack of established legal, political, business and social frameworks to support securities markets, including: delays in settling portfolio securities transactions; currency and capital controls; greater sensitivity to interest rate changes; pervasiveness of corruption and crime; currency exchange rate volatility; and inflation, deflation or currency devaluation. Geographic Focus Because the Fund invests its assets primarily in companies in a specific country or region, the Fund is subject to greater risks of adverse developments in that country and/or the surrounding regions than a fund that is more broadly diversified geographically. Political, social or economic disruptions in the country or region, even in countries in which the Fund is not invested, may adversely affect security values in the country or region in which the Fund is invested. There are special risks associated with investments in India, including exposure to currency fluctuations, less liquidity, expropriation, confiscatory taxation, and exchange control regulations (including currency blockage). Because the Fund typically does not seek to manage its exposure to foreign currencies, the Fund s investments are subject to fluctuations in the value of the Indian rupee. Inflation and rapid fluctuations in inflation and interest rates have had, and may continue to have, negative effects on the economy and securities markets of India. A high proportion of the securities of many Indian issuers are held by a limited number of persons or entities, which may limit the number of shares available for investment by the Fund. Also, a limited number of issuers represent a disproportionately large percentage of market capitalization and trading value. The Portfolio is registered as a sub-account of Franklin Advisers, Inc. with the Securities and Exchange Board of India (SEBI) and is deemed to be a Foreign Portfolio Investor (FPI) under the regulations on foreign investments issued by SEBI. Upon expiration of the current registration certificate, the sub-account will be required to obtain a new FPI registration. There can be no guarantee that regulatory approval will be forthcoming or that it will not be rescinded. Also, the FPI s investments in Indian securities are subject to investment restrictions under SEBI regulations. Prior to the adoption in 2016 of certain amendments to the Treaty, the primary tax advantage of investing through the Portfolio and relying on the Treaty was the elimination of the 15% Indian tax on short-term capital gains. However, due to such amendments, short-term capital gains arising on the sale of certain securities will be subject to a tax on such gains. In addition, the Fund currently takes advantage of India s zero rate (0%) tax on long-term capital gains arising from the sale of certain securities. However, in February 2018, the Indian Finance Minister announced the Budget for financial year 2018-2019 which includes a proposal of a 10% tax on any long-term capital gains recognized on the transfer of certain equity shares. Both of these changes are expected to reduce the return to the Fund on its investments and the return received by the Fund s shareholders. Focus To the extent that the Fund focuses on particular countries, regions, industries, sectors or types of investment from time to time, the Fund may be subject to greater risks of adverse developments in such areas of focus than a fund that invests in a wider variety of countries, regions, industries, sectors or investments. Smaller and Midsize Companies Securities issued by smaller and midsize companies may be more volatile in price than those of larger companies, involve substantial risks and should be considered speculative. Such risks may include greater sensitivity to economic conditions, less certain growth prospects, lack of depth of management and funds for growth and development, and limited or less developed product lines and markets. In addition, smaller and midsize companies may be particularly affected by interest rate increases, as they may find it more difficult to borrow money to continue or expand operations, or may have difficulty in repaying any loans. Growth Style Investing Growth stock prices reflect projections of future earnings or revenues, and can, therefore, fall dramatically if the company fails to meet those projections. Prices of these companies securities may be more volatile than other securities, particularly over the short term. Liquidity From time to time, the trading market for a particular security or type of security or other investments in which the Fund invests may become less liquid or even illiquid. Reduced liquidity will have an adverse impact on the Fund s ability to sell such securities or other investments when necessary to meet the Fund s liquidity needs, in response to a specific economic event or to buy particular securities to invest available cash or when considered advantageous 6 Prospectus franklintempleton.com franklintempleton.com Prospectus 7
FUND SUMMARY FUND SUMMARY by the investment manager. Reduced liquidity will also generally lower the value of such securities or other investments. Market prices for such securities or other investments may be volatile. Management The Fund is subject to management risk because it is an actively managed investment portfolio. The Fund s investment manager applies investment techniques and risk analyses in making investment decisions for the Fund, but there can be no guarantee that these decisions will produce the desired results. Performance The following bar chart and table provide some indication of the risks of investing in the Fund. The bar chart shows changes in the Fund s performance from year to year for Class A shares. The table shows how the Fund s average annual returns for 1 year, 5 years, 10 years or since inception, as applicable, compared with those of a broad measure of market performance. The Fund s past performance (before and after taxes) is not necessarily an indication of how the Fund will perform in the future. You can obtain updated performance information at franklintempleton.com or by calling (800) DIAL BEN/342-5236. Sales charges are not reflected in the bar chart, and if those charges were included, returns would be less than those shown. Class A Annual Total Returns 81.64% 43.77% 36.18% 26.05% 21.17% -31.23% -4.07% -4.41% 1.26% 2009 2010 2011 2012 2013 2014 2015 2016 2017 Year Best Quarter: Q2 09 50.42% Worst Quarter: Q3 11-17.45% Average Annual Total Returns (figures reflect sales charges) For the periods ended December 31, 2017 1 Year 5 Years Since Inception 1 Franklin India Growth Fund - Class A Return Before Taxes 28.31% 11.36% 5.10% Return After Taxes on Distributions 27.44% 11.17% 4.93% Return After Taxes on Distributions and Sale of Fund Shares 16.70% 9.05% 4.07% Franklin India Growth Fund - Class C 34.12% 11.85% 4.97% Franklin India Growth Fund - Class R6 36.99% 13.86% Franklin India Growth Fund - Advisor Class 36.49% 13.00% 6.03% MSCI India Index (index reflects no deduction for fees, expenses or taxes) 38.76% 8.87% 2.08% 1. Since inception for Class A, Class C, Advisor Class, January 31, 2008 and Class R6, May 1, 2013. The after-tax returns are calculated using the historical highest individual federal marginal income tax rates and do not reflect the impact of state and local taxes. Actual after-tax returns depend on an investor s tax situation and may differ from those shown. After-tax returns are not relevant to investors who hold their Fund 8 Prospectus franklintempleton.com franklintempleton.com Prospectus 9
FUND SUMMARY FUND SUMMARY shares through tax-deferred arrangements, such as 401(k) plans or individual retirement accounts. After-tax returns are shown only for Class A and after-tax returns for other classes will vary. Investment Manager Franklin Advisers, Inc. (Advisers) Sub-Advisor Templeton Asset Management Ltd. (TAML) Portfolio Managers Sukumar Rajah Portfolio Manager of TAML and portfolio manager of the Fund since inception (2008). Stephen H. Dover, CFA Executive Vice President of Advisers and portfolio manager of the Fund since inception (2008). Taxes The Fund s distributions are generally taxable to you as ordinary income, capital gains, or some combination of both, unless you are investing through a tax-deferred arrangement, such as a 401(k) plan or an individual retirement account, in which case your distributions would generally be taxed when withdrawn from the taxdeferred account. Payments to Broker-Dealers and Other Financial Intermediaries If you purchase shares of the Fund through a broker-dealer or other financial intermediary (such as a bank), the Fund and its related companies may pay the intermediary for the sale of Fund shares and related services. These payments may create a conflict of interest by influencing the broker-dealer or other intermediary and your salesperson to recommend the Fund over another investment. Ask your financial advisor or visit your financial intermediary s website for more information. Purav A. Jhaveri, CFA, FRM Portfolio Manager of Advisers and portfolio manager of the Fund since inception (2008). Purchase and Sale of Fund Shares You may purchase or redeem shares of the Fund on any business day online through our website at franklintempleton.com, by mail (Franklin Templeton Investor Services, P.O. Box 997151, Sacramento, CA 95899-7151), or by telephone at (800) 632 2301. For Class A and C, the minimum initial purchase for most accounts is $1,000 (or $50 under an automatic investment plan). Class R6 and Advisor Class are only available to certain qualified investors and the minimum initial investment will vary depending on the type of qualified investor, as described under Your Account Choosing a Share Class Qualified Investors Class R6 and Advisor Class in the Fund s prospectus. There is no minimum investment for subsequent purchases. 10 Prospectus franklintempleton.com franklintempleton.com Prospectus 11
Fund Details Investment Goal The Fund s investment goal is long-term capital appreciation. Principal Investment Policies and Practices Under normal market conditions, the Fund invests at least 80% of its net assets in securities of Indian companies, as defined below. Shareholders will be given at least 60 days advance written notice of any change to the 80% policy. The Fund invests primarily in the equity securities of Indian companies, which are companies that: are organized under the laws of, or with a principal office in, or for which the principal trading market for their securities is, India; or derive 50% or more of their total revenue or profit from either goods or services produced or sales made in India; or have 50% or more of their assets in India. An equity security represents a proportionate share of the ownership of a company. Its value is based on the success of the company s business, any income paid to stockholders, and the value of the company s assets, as well as general market conditions. Common stocks, preferred stocks, convertible securities and related depositary receipts are examples of equity securities. The Fund invests primarily in common stocks. Convertible securities generally are debt securities or preferred stock that may be converted into common stock after certain time periods or under certain circumstances. The Fund may invest in convertible securities without regard to the ratings assigned by ratings services. The Fund may invest in companies of any size, and may invest a significant portion of its assets in securities of smaller companies. Although the Fund generally seeks investments across a number of sectors, from time to time, based on economic conditions, the Fund may have significant positions in particular sectors such as financial services. The Fund may also invest in American, Global, and European Depositary Receipts, which are certificates typically issued by a bank or trust company that give their holders the right to receive securities issued by a foreign or domestic corporation. The Fund currently intends to invest primarily in the securities of Indian companies by investing in shares of a wholly-owned, collective investment vehicle (the Portfolio ), registered with and regulated by the Mauritius Financial Services Commission. The Portfolio was formed for the purpose of facilitating the Fund s purchase of securities of a wide selection of Indian companies, consistent with the Fund s investment strategies. The Portfolio historically sought to maintain residency in Mauritius to avail itself of a beneficial income tax treaty between Mauritius and India (the Treaty ). The Treaty has since been amended and may no longer provide beneficial tax treatment for the Fund. Please see Investment through Mauritius below for additional information. To the extent the Fund invests through the Portfolio, an investment in the Fund is an indirect investment in the Portfolio. Unless the context otherwise requires, descriptions in this prospectus of securities and transactions, and their associated risks, refer to Fund investments made directly or indirectly through the Portfolio. In addition to the Fund s main investments, the Fund may invest up to 20% of its net assets in securities that do not qualify as Indian company securities. When consistent with the Fund s investment goal, up to 20% of the Fund s net assets may be invested in debt obligations, including debt obligations of Indian companies, which may be lower-rated or unrated. The investment manager is a research driven, fundamental investor, pursuing a growth strategy for the Fund. As a bottom-up investor focusing primarily on individual securities, the investment manager looks for companies whose current market price does not, in the investment manager s opinion, reflect the company s future growth prospects. The investment manager chooses companies that have identifiable drivers of future earnings growth and present, in the investment manager s opinion, the best trade-off between that potential earnings growth, business and financial risk, and valuation. The investment manager s philosophy includes favoring companies that have competitive advantages through leadingedge products, intellectual property, product positioning, unique market niches, brand identity, solid management teams, strong balance sheets, above average or rising margins, and strong returns on capital invested in the business. In choosing equity investments, the Fund s investment manager also considers such factors as the financial strength of the company, the expertise of management, the growth potential of the company within the industry, and the growth potential of the industry itself. Temporary Investments When the investment manager believes market or economic conditions are unfavorable for investors, the investment manager may invest up to 100% of the Fund s assets (either directly or through the Portfolio) in a temporary defensive manner by holding all or a substantial portion of its assets in cash, cash equivalents or other high quality short-term investments. Temporary defensive investments generally may include short-term U.S. government securities, high grade commercial paper, bank obligations, repurchase agreements, money market fund shares (including shares of an affiliated money market fund) and other money market instruments. The investment manager also may invest in these types of securities or hold cash while looking for suitable investment opportunities, to 12 Prospectus franklintempleton.com franklintempleton.com Prospectus 13
maintain liquidity, or at times when the Fund is open for purchases and redemptions but the Portfolio is not, due to time differences, holidays or otherwise. In these circumstances, the Fund may be unable to achieve its investment goal. Principal Risks Market The market values of securities or other investments owned by the Fund will go up or down, sometimes rapidly or unpredictably. Securities or other investments may decline in value due to factors affecting individual issuers, markets generally or sectors within the markets. The value of a security or other investment may go up or down due to general market conditions which are not specifically related to a particular issuer, such as real or perceived adverse economic conditions, changes in interest rates or exchange rates, or adverse investor sentiment generally. The value may also go up or down due to factors that affect an individual issuer or a particular sector. During a general downturn in the securities markets, multiple asset classes may decline in value. When markets perform well, there can be no assurance that securities or other investments held by the Fund will participate in or otherwise benefit from the advance. Stock prices tend to go up and down more dramatically than those of debt securities. A slower-growth or recessionary economic environment could have an adverse effect on the prices of the various stocks held by the Fund. Foreign Securities (non U.S.) Investing in foreign securities typically involves more risks than investing in U.S. securities. Certain of these risks also may apply to securities of U.S. companies with significant foreign operations. There are special risks associated with investments in India, including exposure to currency fluctuations, less liquidity, expropriation, confiscatory taxation, nationalization, exchange control regulations (including currency blockage) and differing legal standards. Inflation and rapid fluctuations in inflation and interest rates have had, and may continue to have, negative effects on the economy and securities markets of India. A high proportion of the securities of many Indian issuers are held by a limited number of persons or entities, which may limit the number of shares available for investment by the Fund. In addition, further issuances, or the perception that such issuances may occur, of securities by Indian issuers in which the Fund has invested could dilute the earnings per share of the Fund s investment and could adversely affect the market prices of such securities. Sales of securities by such issuers major shareholders, or the perception that such sales may occur, may also significantly and adversely affect the market price of such securities and, in turn, the Fund s investment. In addition, the Indian securities market is significantly supported by foreign investment funds. If the number of foreign investment funds invested in India decreases substantially the Indian securities market may be negatively affected, which would adversely affect the Fund s investment. A limited number of issuers represent a disproportionately large percentage of market capitalization and trading value. The limited liquidity of the Indian securities markets may also affect the Fund s ability to acquire or dispose of securities at the price and time that it desires. Foreign investment in the securities of issuers in India is usually restricted or controlled to some degree. The Securities and Exchange Board of India ( SEBI ), issued new Foreign Portfolio Investors ( FPI ) Regulations ( FPI Regulations ) in 2014, repealing the former regulations regarding Foreign Institutional Investors ( FII ) investment. Franklin Advisers, the Fund s investment manager, was registered with SEBI as an FII and the Fund was registered as a sub-account under Franklin Advisers FII registration, both of which are now deemed to be FPIs. FPI Regulations provide that each foreign institutional investor, qualified foreign investor or sub-account which holds a valid certificate of registration shall be deemed to be an FPI for a period of three years for which fees have been paid under the former regulatory scheme. For renewal of their licenses under FPI Regulations, the FPI and sub-account will be required to obtain approval from a designated depository participant authorized by SEBI to grant such licenses. Currently, under normal circumstances, income, gains and initial capital with respect to such investments are freely repatriable, subject to payment or withholding of applicable Indian taxes. There can be no assurance that these restrictions on foreign investment will not change in a way that makes it more difficult or impossible for the Fund to implement its investment strategies or repatriate its income, gains and initial capital from India. Investment through Mauritius. The Fund currently intends to primarily invest indirectly in securities of Indian companies through the Portfolio, an entity formed in the Republic of Mauritius. The Portfolio has elected to be treated as a disregarded entity for United States federal income tax purposes. A disregarded entity is a separate legal entity that is treated as part of its owner for United States federal income tax purposes. The Portfolio sought to maintain residency in Mauritius in order to allow it (and indirectly, the Fund) to take advantage of the Treaty. The Supreme Court of India has upheld the validity of the Treaty in response to a lower court challenge of the Treaty s applicability to certain foreign entities. The Supreme Court clarified that a certificate of residence in Mauritius is sufficient evidence of residence in Mauritius for purposes of the Treaty, absent fraud or other illegal activities. The Portfolio has received a Tax Residency Certificate from the Mauritius Revenue Authority, which is expected to be renewed on an annual basis. Additionally, the governments of India and Mauritius recently signed a protocol amending the Treaty ( Protocol ). The Protocol gives India the right to tax capital gains which arise from the alienation of shares of an Indian resident company 14 Prospectus franklintempleton.com franklintempleton.com Prospectus 15
acquired by a Mauritian resident. No assurance can be given that the terms of the Treaty will not be further renegotiated or subject to a different interpretation in the future or that the Portfolio will continue to be entitled to take advantage of the Treaty. India imposes a zero rate (0%) of tax on long-term capital gains arising from the sale of equity shares listed on a recognized stock exchange in India or a unit of an equity oriented fund held for more than 12 months, provided that the applicable securities transaction tax has been paid. The Fund can take advantage of this zero tax rate on its investments through the Portfolio. The Indian tax rate on shortterm capital gains realized from the sale of such securities held for 12 months or less is 15% (plus surcharges). Prior to the adoption of the Protocol, the primary tax advantage of investing through the Portfolio and relying on the Treaty was the elimination of the 15% Indian tax on short-term capital gains. Pursuant to the Protocol, following a transition period ending on March 31, 2019, the 15% Indian tax on short-term capital gains will be applicable to the sale of such securities held for 12 months or less that were acquired on or after April 1, 2017. During a transition period beginning on April 1, 2017 and ending on March 31, 2019, short-term capital gains arising on the sale of such shares acquired on or after April 1, 2017 shall be subject to a tax rate not to exceed 50% of the domestic tax rate in India subject to a limitation of benefits provision which could make the more beneficial tax rate unavailable. This tax is expected to reduce the return to the Fund on its investments. Further, in February, 2018, the Indian Finance Minister announced the Budget for financial year 2018-2019 which includes a proposal of a 10% tax on any long-term capital gains recognized on the transfer of listed equity shares, units of an equity oriented mutual fund, and units of business trust, where such gain exceeds INR 100,000 and the transfer occurs after March 31, 2018. The Budget also proposes to introduce limited grandfathering in respect of protecting gains realized on a mark to market basis up to January 31, 2018; therefore the fair market value of these securities at January 31, 2018 will be taken as the cost of acquisition used in computing the long-term capital gain. As a result of the Protocol and the 2018-2019 Budget Proposal, the long-term capital gains tax is expected to reduce the return to the Fund on its investments and the return received by the Fund s shareholders. The government of India will impose certain General Anti-Avoidance Rules ( GAAR ) under the Indian Income Tax Act that could potentially impact the application of the Treaty to the Portfolio. GAAR was effective from the financial year beginning April 1, 2017. The provisions of the Treaty as amended by the Protocol, GAAR and the 2018-2019 Budget Proposal will adversely affect the tax treatment of the Fund s use of the Portfolio, limiting the Fund s ability to pursue its investment strategy. The Fund s Board of Trustees may authorize a significant change in investment strategy. No assurance can be given that the final terms of the Protocol or GAAR will not be subject to change, interpretation and/or renegotiation. Currency exchange rates. Foreign securities may be issued and traded in foreign currencies. As a result, their market values in U.S. dollars may be affected by changes in exchange rates between such foreign currencies and the U.S. dollar, as well as between currencies of countries other than the U.S. For example, if the value of the U.S. dollar goes up compared to a foreign currency, an investment traded in that foreign currency will go down in value because it will be worth fewer U.S. dollars. The Fund accrues additional expenses when engaging in currency exchange transactions, and valuation of the Fund s foreign securities may be subject to greater risk because both the currency (relative to the U.S. dollar) and the security must be considered. Because the Fund typically does not seek to hedge its exposure to foreign currencies, the Fund s investments are subject to fluctuations in the value of the Indian rupee. The ability of the Portfolio to invest in Indian securities, exchange Indian rupees into U.S. dollars and repatriate investment income, capital and proceeds of sales realized from its investments in Indian securities is subject to the Indian Foreign Exchange Management Act, 1999, and the rules, regulations and notifications issued thereunder. There can be no assurance that the Indian government in the future, whether for purposes of managing its balance of payments or for other reasons, will not impose restrictions on foreign capital remittances abroad or otherwise modify the exchange control regime applicable to FPIs, or their sub-accounts, in such a way that may adversely affect the ability of the Fund to repatriate its income and capital. If for any reason the Fund is unable, through borrowing or otherwise, to distribute an amount equal to substantially all of its investment company taxable income (as defined for U.S. tax purposes, without regard to the deduction for dividends paid) within the applicable time periods, the Fund would cease to qualify for the favorable tax treatment afforded to regulated investment companies under the U.S. tax law. Political and economic developments. The political, economic and social policies or structures of some foreign countries may be less stable and more volatile than those in the United States. Investments in these countries may be subject to greater risks of internal and external conflicts, expropriation, nationalization of assets, foreign exchange controls (such as suspension of the ability to transfer currency from a given country), restrictions on removal of assets, political or social instability, military action or unrest, diplomatic developments, currency devaluations, foreign ownership limitations, and punitive or confiscatory tax increases. It is possible that a government may take over the assets or operations of a company or impose restrictions on the exchange or export of currency or other assets. Some countries also may have different legal systems that may make it difficult or 16 Prospectus franklintempleton.com franklintempleton.com Prospectus 17
expensive for the Fund to vote proxies, exercise shareholder rights, and pursue legal remedies with respect to its foreign investments. Diplomatic and political developments could affect the economies, industries, and securities and currency markets of the countries in which the Fund is invested. These developments include rapid and adverse political changes; social instability; regional conflicts; sanctions imposed by the United States, other nations or other governmental entities, including supranational entities; terrorism; and war. In addition, such developments could contribute to the devaluation of a country s currency, a downgrade in the credit ratings of issuers in such country, or a decline in the value and liquidity of securities of issuers in that country. An imposition of sanctions upon certain issuers in a country could result in an immediate freeze of that issuer s securities, impairing the ability of the Fund to buy, sell, receive or deliver those securities. These factors would affect the value of the Fund s investments and are extremely difficult, if not impossible, to predict and take into account with respect to the Fund s investments. Trading practices. Brokerage commissions, withholding taxes, custodial fees, and other fees generally are higher in foreign markets. The policies and procedures followed by foreign stock exchanges, currency markets, trading systems and brokers may differ from those applicable in the United States, with possibly negative consequences to the Fund. The procedures and rules governing foreign trading, settlement and custody (holding of the Fund s assets) also may result in losses or delays in payment, delivery or recovery of money or other property. Foreign government supervision and regulation of foreign securities markets and trading systems may be less than or different from government supervision in the United States, and may increase the Fund s regulatory and compliance burden and/or decrease the Fund s investor rights and protections. Availability of information. Foreign issuers may not be subject to the same disclosure, accounting, auditing and financial reporting standards and practices as U.S. issuers. Thus, there may be less information publicly available about foreign issuers than about most U.S. issuers. In addition, information provided by foreign issuers may be less timely or less reliable than information provided by U.S. issuers. In addition, information provided by foreign issuers may be less timely or less reliable than information provided by U.S. issuers. Limited markets. Certain foreign securities may be less liquid (harder to sell) and their prices may be more volatile than many U.S. securities. Illiquidity tends to be greater, and valuation of the Fund s foreign securities may be more difficult, due to the infrequent trading and/or delayed reporting of quotes and sales. Regional. Adverse conditions in a certain region or country can adversely affect securities of issuers in other countries whose economies appear to be unrelated. To the extent that the Fund invests a significant portion of its assets in a specific geographic region or a particular country, the Fund will generally have more exposure to the specific regional or country economic risks. In the event of economic or political turmoil or a deterioration of diplomatic relations in a region or country where a substantial portion of the Fund s assets are invested, the Fund may experience substantial illiquidity or reduction in the value of the Fund s investments. Developing market countries. The Fund s investments in securities of issuers in developing market countries are subject to all of the risks of foreign investing generally, and have additional heightened risks due to a lack of established legal, political, business and social frameworks to support securities markets. Some of the additional significant risks include: less social, political and economic stability; a higher possibility of the devaluation of a country s currency, a downgrade in the credit ratings of issuers in such country, or a decline in the value and liquidity of securities of issuers in that country if the United States, other nations or other governmental entities (including supranational entities) impose sanctions on issuers that limit or restrict foreign investment, the movement of assets or other economic activity in the country due to political, military or regional conflicts or due to terrorism or war; smaller securities markets with low or non-existent trading volume and greater illiquidity and price volatility; more restrictive national policies on foreign investment, including restrictions on investment in issuers or industries deemed sensitive to national interests; less transparent and established taxation policies; less developed regulatory or legal structures governing private and foreign investment or allowing for judicial redress for injury to private property, such as bankruptcy; less familiarity with a capital market structure or market-oriented economy and more widespread corruption and fraud; less financial sophistication, creditworthiness and/or resources possessed by, and less government regulation of, the financial institutions and issuers with which the Fund transacts; less government supervision and regulation of business and industry practices, stock exchanges, brokers and listed companies than in the U.S.; greater concentration in a few industries resulting in greater vulnerability to regional and global trade conditions; higher rates of inflation and more rapid and extreme fluctuations in inflation rates; greater sensitivity to interest rate changes; 18 Prospectus franklintempleton.com franklintempleton.com Prospectus 19
increased volatility in currency exchange rates and potential for currency devaluations and/or currency controls; greater debt burdens relative to the size of the economy; more delays in settling portfolio transactions and heightened risk of loss from share registration and custody practices; and less assurance that when favorable economic developments occur, they will not be slowed or reversed by unanticipated economic, political or social events in such countries. Because of the above factors, the Fund s investments in developing market countries may be subject to greater price volatility and illiquidity than investments in developed markets. Geographic Focus Because the Fund invests its assets primarily in Indian companies, it is subject to much greater risks of adverse events that occur in India and the surrounding regions, and may experience greater volatility than a fund that is more broadly diversified geographically. Religious and border disputes persist in India, and India has from time to time experienced civil unrest and hostilities with countries such as Pakistan. The longstanding dispute with Pakistan over the bordering Indian states of Jammu and Kashmir, a majority of whose population is Muslim, remains unresolved. Political, social or economic disruptions in the Indian region, including conflicts and currency devaluations, or natural or man-made disasters even in countries in which the Fund is not invested, may adversely affect security values in countries in the region and thus the value of the Fund s holdings. Focus The greater the Fund s exposure to any single type of investment including investment in a given industry, sector, region, country, issuer, or type of security the greater the losses the Fund may experience upon any single economic, business, political, regulatory, or other occurrence. As a result, there may be more fluctuation in the price of the Fund s shares. Financial services companies. To the extent that the Fund has significant investments in the financial services industry, the Fund will be particularly sensitive to the risks of that industry. These risks include the effects of: (1) changes in interest rates on the profitability of financial services companies; (2) the rate of corporate and consumer debt defaults; (3) price competition; (4) governmental limitations on a company s loans, other financial commitments, product lines and other operations; and (5) ongoing changes in the financial services industry (including consolidations, development of new products and changes to the industry s regulatory framework). The oversight of, and regulations applicable to, companies in the financial services industry in developing markets may be ineffective and underdeveloped relative to more developed markets. Smaller and Midsize Companies While smaller and midsize companies may offer substantial opportunities for capital growth, they also involve substantial risks and should be considered speculative. Historically, smaller and midsize company securities have been more volatile in price than larger company securities, especially over the short term. Among the reasons for the greater price volatility are the less certain growth prospects of smaller and midsize companies, the lower degree of liquidity in the markets for such securities, and the greater sensitivity of smaller and midsize companies to changing economic conditions. In addition, smaller and midsize companies may lack depth of management, be unable to generate funds necessary for growth or development, have limited product lines or be developing or marketing new products or services for which markets are not yet established and may never become established. Smaller and midsize companies may be particularly affected by interest rate increases, as they may find it more difficult to borrow money to continue or expand operations, or may have difficulty in repaying loans, particularly those with floating interest rates. Growth Style Investing Growth stock prices reflect projections of future earnings or revenues, and can, therefore, fall dramatically if the company fails to meet those projections. Growth stocks may be more expensive relative to their current earnings or assets compared to value or other stocks, and if earnings growth expectations moderate, their valuations may return to more typical norms, causing their stock prices to fall. Prices of these companies securities may be more volatile than other securities, particularly over the short term. Liquidity Liquidity risk exists when the markets for particular securities or types of securities or other investments are or become relatively illiquid so that the Fund is unable, or it becomes more difficult for the Fund, to sell the security or other investment at the price at which the Fund has valued the security. Illiquidity may result from political, economic or issuer specific events; supply/demand imbalances; changes in a specific market s size or structure, including the number of participants; or overall market disruptions. Securities or other investments with reduced liquidity or that become illiquid may involve greater risk than securities with more liquid markets. Market prices or quotations for illiquid securities may be volatile, and there may be large spreads between bid and ask prices. Reduced liquidity may have an adverse impact on market price and the Fund s ability to sell particular securities when 20 Prospectus franklintempleton.com franklintempleton.com Prospectus 21