To a large extent, international mutual funds are no longer available to Indian mutual fund investors. But what does this actually mean for someone trying to build wealth? How is that affecting Indian investors?

If we look at the returns generated by Indian stock markets and the US stock market over the last 5 years, it looks like a loss for Indian investors.

Over the past five years, US stock markets have outperformed Indian markets, with the Nasdaq 100 increasing by 96.5% and the S&P 500 by 73.2%, while the Nifty 50 and Sensex rose by approximately 50%.

Additionally, the nearly 29.54% depreciation of the Indian Rupee against the USD during the last five years has further enhanced returns for Indian investors in US markets, making a case for diversification into dollar investments.

A proper diversification of investments should include large, mid, and small cap stocks within the domestic economy as well as across different geographies. And, with the US stock market, because of its large and deep market, it can be looked at for diversifying abroad, for long-term investing.

Why the door to global funds is nearly shut

Since SEBI’s restrictions on overseas funds are still in place, very few mutual fund companies allow Indian clients to subscribe to their international fund schemes.

The Securities and Exchange Board of India (SEBI) reorganized maximum limits on foreign securities investments by fund houses in November 2020 and June 2021. The industry cap has remained at $7 billion for six years, which has already been exceeded. Indian mutual funds can invest up to $1 billion each, adhering to the overall $7 billion limit set by SEBI.

Therefore, Indian investors have limited options to invest in global markets. While the framework for investing abroad in equity markets exists, the doors are shut (almost) for a mutual fund investor.

In addition, mutual funds can launch their overseas ETFs, but they also have caps. Mutual Funds can make investments in overseas Exchange Traded Funds (ETFs) subject to a maximum of US $300 million per Mutual Fund, within the overall industry limit of US $1 billion. So even the ETF route offers only limited headroom.

Don’t invest in the US just because India looks gloomy

Currently, US markets are at record high levels, thanks to the big tech stocks and particularly the rally seen in the AI-led companies. Therefore, the concentration risk is emerging in such a market, with valuations also breaching historical levels.

The gloomy state of one’s own market should not be the basis for investing in US markets. Instead, the goal should be to expand geographically, get a currency advantage, and also to own some of the global companies, for the long term.

This is also why short-term comparisons can be misleading. Do not look at 1-3-5 year returns solely to decide to invest in US markets. Here’s an interesting data point on the two markets.

The small-mid-cap and large-cap funds in India have generated a CAGR of 14-16% over the last 10 years. In comparison, the international funds managed 12%, although the category also includes non-US global equities and even non-equity asset classes.

And even if you do decide to diversify, the size of your allocation matters more than the decision itself. A little amount of exposure (read 5–10%) won’t considerably lessen market blows or increase profits (since the tax rate is higher), according to a Freefincal analysis. Freefincal suggests that if you want international equities to make a difference in your equity portfolio, at least 20–30% exposure is required.

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The workaround: international brokerage platforms

A much easier option left for Indian investors is the route of international brokerage platforms such as Appreciate and Vested Finance. One can invest through them in buying direct stocks and even ETFs linked to Nasdaq and S&P 500 indices.

However, for someone going through these platforms, the RBI formalities have to be met to adhere to the conditions of the Liberalised Remittance Scheme (LRS). The scheme permits all resident individuals, including minors, to remit up to $250,000 per financial year for any permissible current or capital account transaction or a combination of both.

This is not the case for international mutual funds, and investors need not worry about the RBI’s LRS formalities.

The risks you shouldn’t skip

Meanwhile, most foreign funds have mostly closed their subscription windows, reopening them intermittently for lump-sum or SIP investments when limits decrease. This situation forces investors into ad-hoc investing, which is not advisable for effective planning.

Investing in US stocks doesn’t come without risks, some common to Indian equities. Make sure you understand the risks of international investing before opening a foreign brokerage account. And also the costs involved to justify an optimal allocation to international equities.

Disclaimer: This article is for informational purposes only and does not constitute investment advice. Mutual fund and equity investments are subject to market risks; please read all scheme-related documents carefully before investing. Past performance, including returns cited above, is not indicative of future results. Currency movements, regulatory caps, and international market conditions can change without notice. Readers are advised to consult a SEBI-registered financial advisor before making any investment decisions, including those involving overseas brokerage platforms or foreign securities. Financial Express is not responsible for any decisions made based on this information.