Given the volatility in the Indian market, individuals can consider investing in overseas fund-of-funds (FoFs) to diversify risk. These funds offer a SEBI-regulated, simple way to access economies with growth cycles decoupled from India’s macro pressures.
Over the last one year, overseas FoFs have outperformed domestic categories, delivering average returns of 46% compared to 3% for large-cap funds and 5% for flexi-cap funds. Over a three-year period as well, overseas FoFs have generated 25% returns versus 14% for large-cap and 16% for flexi-cap funds.
Investments in overseas FoFs can benefit from the currency depreciation over time and enhance returns in rupee terms. “For a retail investor with a salary, liabilities, and rupee savings, holding some wealth in global assets adds genuine portfolio resilience. It is not speculation,” says Sonam Srivastava, founder, Wright Research PMS.
How to invest
Domestic investors can invest in overseas FoFs just like any mutual fund, through direct plans or distributors via platforms. For those preferring the demat route, several overseas FoF units are tradable on stock exchanges. Domestic investors do not need a foreign brokerage account, LRS remittance, or currency conversion. The key step is to check real-time headroom availability at the mutual fund house. “Investors can check whether overseas FoFs are accepting fresh investments via AMC websites, mutual fund platforms, or distributor dashboards, as inflows are periodically restricted due to RBI limits,” says Nirav Karkera, head, Research, Fisdom.
What to consider
Investors should first evaluate global market valuations, taxation and the overall costs. A US technology FoF and an emerging market FoF will perform very differently across economic cycles. The US tech mandate is a high-beta, high-conviction bet on AI and platform businesses. The emerging market mandate is a bet on demographic growth and commodity tailwinds in markets like Brazil, Taiwan, and Korea.
Overseas FoFs suit long-term investors with a horizon of at least five to seven years. Short-term investors often find the combination of currency fluctuations and global market volatility difficult to manage without locking in losses. “Adding 10 to 15% to a well-chosen overseas FoF, with full awareness of the tax treatment, the expense drag, and the regulatory constraints, makes your portfolio structurally more resilient without meaningfully complicating it,” says Gaurav Didwania, partner, Qode Advisors.
As overseas FoFs are taxed as debt funds, the gains are taxed at the marginal rate regardless of the holding period. This is a big disadvantage relative to domestic equity funds, where long-term gains above Rs 1.25 lakh annually are taxed at 12.5%.