Investing Beyond Borders: A Guide to International Mutual Funds for Indian Investors

As an Indian investor, your focus has likely been on the Nifty, Sensex, and a universe of domestic stocks. But what if you could own a piece of the global companies whose products you use daily, like Apple, Google, or Tesla? What if you could tap into the economic growth of developed markets like the US or emerging economies across Asia?

This is where international mutual funds come in. They offer a simple gateway to diversify your portfolio beyond India’s borders, providing a potential cushion against domestic market volatility and unlocking a world of new opportunities.

Key Takeaways

• True Diversification: International funds reduce your portfolio’s dependence on the Indian economy. When Indian markets underperform, global markets might perform well, balancing your overall returns.
• Access to Global Giants: Invest in world-leading companies and innovative sectors—like US technology, European luxury, or Asian manufacturing—that aren’t available on Indian exchanges.
• Understand the Risks: These funds carry unique risks, primarily currency fluctuations (Rupee vs. Dollar) and geopolitical events in other countries.
• Regulatory Limits are Crucial: SEBI has set limits on how much Indian mutual funds can invest overseas. These limits have been reached, pausing fresh investments in most schemes. Always check a fund’s current status before trying to invest.

Why Invest Beyond India? The Case for Global Diversification

Relying solely on the Indian market is like putting all your eggs in one basket. While our economy has strong long-term potential, it’s still subject to its own cycles and risks. International diversification helps spread that risk.

1. Low Correlation: Foreign markets, especially developed ones like the US, often have a low correlation with Indian markets. This means they don’t always move in the same direction, which can help stabilize your portfolio’s returns over time.
2. Currency Hedging: Investing in assets denominated in foreign currencies like the US Dollar can be beneficial. If the Indian Rupee depreciates against the dollar, the value of your international investments increases when converted back to Rupees, boosting your returns.
3. Tapping into Global Growth: Many of the world’s most innovative and dominant companies are listed abroad. International funds give you a chance to participate in their growth story, whether it’s in artificial intelligence, electric vehicles, or global healthcare.

Types of International Funds in India

International funds are categorized based on their investment strategy and geographical focus. Here are the most common types:

• Fund of Funds (FoFs): This is the most popular route. An Indian mutual fund (the FoF) pools money from investors and invests it into an existing, larger fund in a foreign market (the master fund). For example, many Indian funds are FoFs that invest in a US-based Nasdaq 100 or S&P 500 ETF.
• Direct Equity Funds: Some funds directly buy and sell shares of foreign companies. These are actively managed by a fund manager who picks stocks based on their research.
• Region- or Country-Specific Funds: These funds focus on a particular geography, such as US-focused funds, Europe-focused funds, or funds that invest across emerging markets in Asia.
• Global Sector Funds: These funds invest in a specific industry, like technology, healthcare, or energy, but with companies from all over the world.

Some popular categories that Indian investors often consider include:

• US-focused Index Funds: Funds tracking the S&P 500 (top 500 US companies) or the Nasdaq 100 (top 100 non-financial US companies, with a heavy tech focus). Examples include the Motilal Oswal S&P 500 Index Fund and Motilal Oswal Nasdaq 100 FoF.
• Emerging Market Funds: These funds invest in a basket of developing economies, offering high growth potential but also carrying higher risk.
• Global Thematic Funds: Funds that focus on themes like electric vehicles, AI, or clean energy.

The Main Hurdle: SEBI’s Overseas Investment Limits

This is the most critical factor for investors to understand today. To manage the country’s foreign exchange outflows, the RBI and SEBI have capped the total amount Indian mutual funds can invest abroad.

• Industry-wide Limit: USD 7 billion for investing in overseas securities.
• ETF-Specific Limit: A separate USD 1 billion for investing in international ETFs.

The Indian mutual fund industry breached the USD 7 billion limit in February 2022 and the USD 1 billion ETF limit in April 2024.

What does this mean for you? As a result, most Asset Management Companies (AMCs) have stopped accepting new lump-sum investments and, in many cases, even new SIPs into their international funds. While some existing SIPs may continue, no significant new investments are possible until these limits are increased by the regulator or redemptions by existing investors create fresh room. Always check the current status of an international fund with the AMC before attempting to invest.

Performance and Risks: A Double-Edged Sword

International funds have shown strong performance recently. In the past year, the category delivered an average return of about 14.5%, largely driven by a rally in US tech stocks and a recovery in some Asian markets. This highlights the benefit of diversification, especially when domestic markets may be moving sideways.

However, these returns come with unique risks:

• Currency Risk: This is the most significant risk. If the Rupee strengthens against the US Dollar, it will reduce the value of your US-based investments when converted back to Rupees, even if the fund performed well in dollar terms. Conversely, a weaker Rupee can boost your returns.
• Geopolitical Risk: Political instability, trade wars, or economic recessions in foreign countries can negatively impact your investments.
• Regulatory Changes: Different countries have different laws. A change in tax policy or investment rules in a foreign nation can affect your fund’s performance.

How to Fit International Funds into Your Portfolio

Given the benefits and risks, how much should you allocate? Financial experts generally suggest a modest allocation for diversification.

For most retail investors, an allocation of 10-15% of your total equity portfolio to international funds is a sound starting point. This is enough to provide meaningful diversification without taking on excessive currency or geopolitical risk. You can consider increasing this to 20% if you have a higher risk tolerance and a long-term investment horizon.

Due to the current SEBI limits, investors can also consider alternatives:

• MNC Funds: These funds invest in Indian-listed subsidiaries of multinational corporations, offering indirect exposure to global businesses.
• Liberalised Remittance Scheme (LRS): This RBI scheme allows you to directly remit up to USD 250,000 per financial year to invest in foreign stocks or ETFs. However, this route requires more research, effort, and dealing with international brokers.

Investing in international funds is a marathon, not a sprint. It’s a strategic tool for building a resilient, globally diversified portfolio for the long term.

This article is for informational purposes only and does not constitute investment advice. Please conduct your own research before investing.