- Date : 19/07/2021
- Read: 5 mins
Pandemic-induced uncertainties have stoked interest in overseas stocks, and SEBI has played along.
There’s some good news for domestic investors who want to diversify their portfolio with an international exposure: the Securities and Exchange Board of India (SEBI) has just taken some more steps to facilitate this.
On June 3, SEBI issued a circular raising the overseas investment limit for an individual Mutual Fund house from $600 million to $1 billion. Alongside, the market regulator also raised the maximum investment limit in overseas ETFs from $200 million to $300 million.
According to media reports, this decision was taken in view of an enhanced new appetite for global stocks among Indian investors.
Why the overseas investment limit was raised
According to reports, the search for ‘FAANG company’ – meaning Facebook, Amazon, Apple, Netflix, and Google – grew more than 5000% in India in April 2020, the first full month of the nationwide lockdown.
By Google standards, a 5000% growth in a search term is a ‘breakout’. Simply put, Indian investors had begun looking at overseas options when the full impact of the lockdown and the pandemic started being felt in the markets.
Subsequently, fund houses approached SEBI for an upward revision of the overseas investment limit. Apparently, many of these AMCs were close to the previous foreign investment limit of $600 million and needed room to absorb more investors.
What this means is those interested in investing in international stocks will find fund houses in a better position to accommodate them.
Investing in International Mutual Funds
If, as an investor, you are keen on diversification, you too could perhaps think of including a few overseas stocks. In that case, now would be a good time to look at International Mutual Funds (IMFs), which invest only in foreign companies and foreign markets.
Investing in IMFs is similar to buying a regular fund – through distributors, AMCs, online portals etc. You can also go the SIP way with an IMF. Currently, Indian investors have the option to invest in the US, Europe, China, Brazil, and Asian and Emerging Markets.
When you invest in an IMF, you will be parking your money in a feeder fund based in India, which will then invest in a master fund based in another country, say the US. It is this master fund that will invest in the identified Mutual Funds in the international market.
Mind you, IMFs are not without risks. First, they are subject to currency fluctuations; for example, if the rupee gains against the dollar, your earnings in dollar terms get reduced. Second, the performance of the IMF will be impacted by the political, social, and economic issues of the country your master fund has invested in.
Also, don't forget the tax angle. If your hold your IMF for less than three years, you will be levied a short-term capital gains tax on your profits as per your tax slab. If the holding period is more than this time period, you will get indexation benefit as yours profits will be treated as long-term capital gain.
Advantages of International Mutual Funds
Despite the drawbacks, investors pursue IMFs because they provide the following benefits:
- Geographic diversification: With IMFs, investors get an opportunity to earn from the positive market cycle of another country’s economy
- Portfolio diversification: Investors get to spread their portfolios, and this can compensate for any losses in the domestic markets
- Cost-effectiveness: Selecting the right IMF can help balance the costs back home to create a cost-effective portfolio
- Expert management: These funds allow you to gain exposure to foreign markets through a qualified fund manager
Top 10 International Mutual Funds in India
Here are the top 10 International Mutual Funds (5 year returns considered) as on 27 April 2021, as per data released by Value Research:
Related: Diversify your equity portfolio by investing in stocks overseas
How do Domestic Index Funds stack up against IMFs?
Admittedly, IMFs are not the only investment option that got a boost because of the pandemic. Index funds benefited too. These are Mutual Funds that are passively managed, as their purpose is to track and emulate the performance of a stock market index.
A class of equity funds, the asset allocation of an index fund would be the same as that of its underlying index; as a result, the returns, too, are comparable.
The underlying indices of Indian index funds are the Nifty 50 and the BSE Sensex, which over the past three decades have tided over challenges such as the 2008 recession, virus outbreaks (Zika, Ebola, SARS etc.), and geopolitical tensions.
The blue-chip stocks that make up these two benchmark indices bring stability to Indian index funds, making them less susceptible to market fluctuations. This also explains why these were much sought-after post the COVID-19 outbreak.
Returns of index funds in India are also comparable with that of IMFs, as can be seen from the data below:
Related: Overseas investment: How it can make your investment portfolio shine
Last words
If you are considering investing in IMFs and exploring the foreign markets, you need to take into account the various risk factors to ensure the safety of your funds. Once you have invested in the right market, you can reasonably expect to extract the maximum returns, plus the advantages of portfolio diversification.
The icing on the cake: you get a chance to own stocks of global behemoths such as Apple, Amazon, Mastercard, Alphabet (formerly Google), Microsoft, and Facebook!
Disclaimer: This article is intended for general information purposes only and should not be construed as investment or tax or legal advice. You should separately obtain independent advice when making decisions in these areas.
There’s some good news for domestic investors who want to diversify their portfolio with an international exposure: the Securities and Exchange Board of India (SEBI) has just taken some more steps to facilitate this.
On June 3, SEBI issued a circular raising the overseas investment limit for an individual Mutual Fund house from $600 million to $1 billion. Alongside, the market regulator also raised the maximum investment limit in overseas ETFs from $200 million to $300 million.
According to media reports, this decision was taken in view of an enhanced new appetite for global stocks among Indian investors.
Why the overseas investment limit was raised
According to reports, the search for ‘FAANG company’ – meaning Facebook, Amazon, Apple, Netflix, and Google – grew more than 5000% in India in April 2020, the first full month of the nationwide lockdown.
By Google standards, a 5000% growth in a search term is a ‘breakout’. Simply put, Indian investors had begun looking at overseas options when the full impact of the lockdown and the pandemic started being felt in the markets.
Subsequently, fund houses approached SEBI for an upward revision of the overseas investment limit. Apparently, many of these AMCs were close to the previous foreign investment limit of $600 million and needed room to absorb more investors.
What this means is those interested in investing in international stocks will find fund houses in a better position to accommodate them.
Investing in International Mutual Funds
If, as an investor, you are keen on diversification, you too could perhaps think of including a few overseas stocks. In that case, now would be a good time to look at International Mutual Funds (IMFs), which invest only in foreign companies and foreign markets.
Investing in IMFs is similar to buying a regular fund – through distributors, AMCs, online portals etc. You can also go the SIP way with an IMF. Currently, Indian investors have the option to invest in the US, Europe, China, Brazil, and Asian and Emerging Markets.
When you invest in an IMF, you will be parking your money in a feeder fund based in India, which will then invest in a master fund based in another country, say the US. It is this master fund that will invest in the identified Mutual Funds in the international market.
Mind you, IMFs are not without risks. First, they are subject to currency fluctuations; for example, if the rupee gains against the dollar, your earnings in dollar terms get reduced. Second, the performance of the IMF will be impacted by the political, social, and economic issues of the country your master fund has invested in.
Also, don't forget the tax angle. If your hold your IMF for less than three years, you will be levied a short-term capital gains tax on your profits as per your tax slab. If the holding period is more than this time period, you will get indexation benefit as yours profits will be treated as long-term capital gain.
Advantages of International Mutual Funds
Despite the drawbacks, investors pursue IMFs because they provide the following benefits:
- Geographic diversification: With IMFs, investors get an opportunity to earn from the positive market cycle of another country’s economy
- Portfolio diversification: Investors get to spread their portfolios, and this can compensate for any losses in the domestic markets
- Cost-effectiveness: Selecting the right IMF can help balance the costs back home to create a cost-effective portfolio
- Expert management: These funds allow you to gain exposure to foreign markets through a qualified fund manager
Top 10 International Mutual Funds in India
Here are the top 10 International Mutual Funds (5 year returns considered) as on 27 April 2021, as per data released by Value Research:
Related: Diversify your equity portfolio by investing in stocks overseas
How do Domestic Index Funds stack up against IMFs?
Admittedly, IMFs are not the only investment option that got a boost because of the pandemic. Index funds benefited too. These are Mutual Funds that are passively managed, as their purpose is to track and emulate the performance of a stock market index.
A class of equity funds, the asset allocation of an index fund would be the same as that of its underlying index; as a result, the returns, too, are comparable.
The underlying indices of Indian index funds are the Nifty 50 and the BSE Sensex, which over the past three decades have tided over challenges such as the 2008 recession, virus outbreaks (Zika, Ebola, SARS etc.), and geopolitical tensions.
The blue-chip stocks that make up these two benchmark indices bring stability to Indian index funds, making them less susceptible to market fluctuations. This also explains why these were much sought-after post the COVID-19 outbreak.
Returns of index funds in India are also comparable with that of IMFs, as can be seen from the data below:
Related: Overseas investment: How it can make your investment portfolio shine
Last words
If you are considering investing in IMFs and exploring the foreign markets, you need to take into account the various risk factors to ensure the safety of your funds. Once you have invested in the right market, you can reasonably expect to extract the maximum returns, plus the advantages of portfolio diversification.
The icing on the cake: you get a chance to own stocks of global behemoths such as Apple, Amazon, Mastercard, Alphabet (formerly Google), Microsoft, and Facebook!
Disclaimer: This article is intended for general information purposes only and should not be construed as investment or tax or legal advice. You should separately obtain independent advice when making decisions in these areas.
