Indian investors are increasingly looking at international mutual funds after strong global market returns in recent years. However, experts caution that while these funds offer diversification benefits, investors must also understand regulatory limits, costs, and long-term risks before investing.
What are international funds?
Explaining the concept in a conversation on Zee Business, Mohit Gang, CEO of Moneyfront, said that most mutual fund investments in India typically go into domestic equities.
“When an investor invests through mutual funds, usually the investment goes into Indian markets. That means Indian listed stocks—large cap, mid cap, or small cap,” Gang explained. He added that these companies are closely linked to the Indian economy and their performance depends on domestic economic conditions.
He said international funds work differently.
“When you give money to a fund house and tell them to invest outside India—whether US markets, Europe, China, emerging economies, or other global markets—that is called international investing,” Gang said.
He noted that global markets have recently delivered strong returns compared to India. He cited examples where South Korea delivered around 110 per cent growth, Taiwan showed triple-digit returns, Turkey delivered around 54 per cent, Japan around 45 per cent, and US markets around 24–27 per cent, while Indian markets were down around -5 per cent to -7 per cent in the same period.
GIFT City and LRS emerging as investment routes
Mrin Agarwal, Founder of Finsafe, said investors now have multiple ways to access global markets, including through the Liberalised Remittance Scheme (LRS).
“Through the Liberalised Remittance Scheme (LRS), an individual can use up to $250,000 per year for investments, education, medical purposes, and other defined uses,” Agarwal said.
She added that GIFT City is also becoming an alternative route, allowing investments in foreign stocks, ETFs, and funds with global exposure.
However, she cautioned that the ecosystem is still developing.
“At present, only about four mutual fund schemes are available, and long-term performance data is still limited,” she noted.
Restrictions on international mutual funds in India
Mohit Gang explained that regulatory limits have significantly reduced the availability of international mutual fund options.
“The RBI had set a $7 billion limit for the entire mutual fund industry for overseas investments,” he said, adding that there were also scheme-level and fund-house-level caps.
He noted that due to rising assets and currency depreciation, many fund houses have hit these limits.
“As a result, today practically no fund house allows fresh lump-sum investments in international schemes,” Gang said.
He added that only a few schemes still allow SIP investments, and even those come with strict limits depending on the fund house. Existing SIPs continue, but fresh investments are limited.
How investors should approach international funds?
Agarwal said investors should not select funds just based on availability.
“Investors should first decide which geography, sector, or theme they want exposure to, rather than picking from whatever is currently open,” she said.
She added that investors should avoid chasing recent performance trends.
“Just because a country or theme has performed well recently does not mean it will continue,” Agarwal cautioned.
She also pointed out that international investing comes with higher costs, currency risk, and structural complexity compared to domestic funds.
Key benefits of international investing
According to Gang, there are three major benefits of international exposure.
First, it provides access to global sectors not easily available in India.
“There are many themes like semiconductors, artificial intelligence, biotechnology, renewable energy, and global mining companies that are not available in India at scale,” he said.
Second, it helps with diversification.
“Different markets perform differently at different times. This creates a natural hedge for the portfolio,” Gang said.
Third, it offers currency benefits.
He noted that the Indian rupee has depreciated by around 3.5 per cent annually against the US dollar over the last 20 years, which can add to returns when investing globally.
Because of these factors, he suggested that a 10–20 per cent allocation to international assets can help balance a portfolio.
Taxation rules differ across structures
Gang also explained the taxation differences between investment routes.
He said domestic equity funds are taxed at 12.5 per cent long-term capital gains after one year, with gains up to Rs 1.25 lakh exempt, and short-term gains taxed at 20 per cent.
For international fund-of-funds, long-term capital gains apply after two years at 12.5 per cent, while shorter durations are treated as short-term gains.
He added that GIFT City taxation varies depending on structure, and in many cases, taxation applies at the fund level rather than directly for investors.
Should you add international funds to your portfolio?
Experts agreed that international funds are not necessary for every investor.
Gang said investors seeking a dollar-denominated portfolio, global diversification, or currency hedging may benefit from international exposure.
He also noted that India accounts for only about 3–4 per cent of global market capitalisation, meaning domestic investing covers only a small portion of global opportunities.
However, he said conservative investors, especially retirees seeking stable income, may avoid such investments due to higher complexity and risk.
Key takeaways for investors
Experts emphasised that international funds can play an important role in diversification, but investors should approach them carefully and with a long-term perspective.
As Agarwal noted, investors must avoid chasing trends and instead focus on asset allocation, geography selection, and risk understanding before investing globally.
With new routes like GIFT City and LRS expanding, international investing options for Indian investors are expected to grow further in the coming years.
