Why is there a need to add international funds?
Even though India is now among the top five countries by market capitalisation, its share in the global market capitalisation is between 3-4%. Given this low share, there is a need to diversify equity portfolios geographically to manage risk and participate in industries, technology and companies that are not available in India. There will also be periods when the Indian economy will go through rough patches and global markets will perform well and vice versa, and in such scenarios, diversification helps. Many large businesses in areas like e-commerce, electric vehicles, technology and biotechnology are based in markets like the US and Europe. By investing in international funds you get an opportunity to own world class companies.
Are there any limits on international investments?
The RBI regulates fund inflows and outflows and currently, there is an overall industry-level limit of $7 billion for mutual funds. Since the industry reached this limit in February 2022, mutual funds were asked to stop accepting fresh flows. However, later in the year, global markets witnessed a sharp correction that led to a reduction in the valuation of international stocks. This rubbed off on the cumulative investments made by international MF schemes, creating scope for fresh investments in this category. Based on this drop, the regulator again allowed inflows into these schemes subject to certain restrictions which led to some fund houses accepting fresh investments. Investors should bear in mind that it is subject to changes based on overall limits available to the fund house and the industry and hence they should check first whether the schemes are still open for investments.
What types of international funds are available to Indian investors?
Funds on offer to Indian investors invest in international markets either directly or have the option to invest in other funds in those markets. The latter way is called a feeder route and is typically in the form of a fund of funds (FoF). With Indian investors showing an inclination to invest overseas, there are several products available. They could be thematic passive funds, country-specific and region-specific funds, consumer funds and technology funds. Some of the popular funds are US-based funds and passive ones based on the Nasdaq 100 and S&P 500 indices. A resident Indian investor can invest in Indian rupees. As one does for any mutual fund, you can select the scheme, write a cheque in rupees or invest online.
How are international funds taxed?
From a taxation perspective, international funds are treated on par with debt mutual funds. The advantage of long-term capital gains tax with indexation benefit is no longer available for these funds since the start of this financial year. Investors will have to pay tax on gains in line with their income slabs.
