Investing in a Profitable Foreign Exchange Traded Fund: Which One to Choose?
In light of the Securities and Exchange Board of India (SEBI) restrictions on overseas investments for mutual funds in India, finding the best international mutual funds requires a strategic approach. Here's a guide to understanding the current landscape and exploring alternatives.
Understanding the Restrictions
The regulatory caps on international investments are significant. The industry as a whole is limited to investing a maximum of USD 7 billion, while each Asset Management Company (AMC) can invest up to USD 1 billion, and international ETFs are capped at USD 1 billion each. Due to these limits, most international mutual funds in India are currently closed to new investments, except to match recent redemptions.
Alternatives for Investing in International Markets
- Hybrid/Combo Funds: Funds like Parag Parikh Flexi Cap Fund and DSP Value Fund offer exposure to both Indian and international stocks, helping maintain some level of global diversification while adhering to regulatory limits.
- International ETFs: Although international ETFs are subject to restrictions, they can still be traded on exchanges. However, investors should be cautious of overpaying due to high demand and potential premium prices.
- Direct Investment Through LRS: The RBI's Liberalized Remittance Scheme (LRS) allows individuals to invest directly in global markets with up to $250,000 per year. However, this method involves high costs, currency conversion charges, and complex tax rules.
- Investing via Gift City: This is a newer and potentially simpler option for accessing international markets. Gift City offers a financial hub where investors can access global markets more easily compared to LRS.
- Global Mutual Funds Outside of India: Consider investing directly in international mutual funds outside the Indian regulatory framework if feasible. Some top-rated international funds include Fidelity Total International Index FTIHX, iShares Core MSCI Total International Stock ETF IXUS, and Vanguard Total International Stock ETF/Index VXUS.
Strategic Considerations
- Tax Implications: Be aware of the tax implications of different investment strategies. For example, Indian funds with over 65% in Indian equities are taxed differently from pure international funds.
- Risk Management: Diversify your portfolio to manage risk, especially in a restricted environment.
By leveraging these alternatives and staying informed about regulatory updates, investors can continue to access international markets despite the current restrictions. Ideally, investors should consider investing in a broader index like S&P 100 or S&P 500 for diversification. It is not recommended to invest in these ETFs at a premium.
Indian mutual funds offer a variety of options under the international ETFs umbrella, including region-focused, country-specific, and thematic funds. Funds such as Parag Parikh Flexi Cap, DSP Value Fund, and Axis Growth Opportunities Fund invest a portion of their portfolio in international stocks while maintaining at least 65% equity exposure to Indian stocks. An active fund called ICICI Prudential US Bluechip Equity focuses on US stocks and is managed like an equity fund in India.
There are several international ETFs currently available for investments, such as Aditya Birla Sun Life NASDAQ 100 FOF, Invesco India - Invesco EQQQ NASDAQ-100 ETF FoF, Kotak Nasdaq 100 FOF, Navi US Total Stock Market Fund of Fund, and Navi Nasdaq 100 Fund of Fund. Indian fund houses manage passive funds like Motilal Oswal S&P 500 Index Fund and Mirae Asset NYSE FANG+ ETF.
As of now, most ETF FoFs open for subscription invest in the Nasdaq 100 index, which is a thematic index focused on tech stocks. Investors can buy units of international ETFs run by Indian fund houses, but these funds may be trading at a premium due to increased demand. There is a category of funds called funds of funds that invest money from Indian investors in existing international ETFs. Currently, investment is available only in this category. The separate limit for funds investing in ETFs is USD 300 million per fund and USD 1 billion for the industry. Investing in a global market less correlated to Indian stock markets can offer better diversification. The ban on mutual funds investing in foreign stocks may be lifted if the Reserve Bank of India increases the investment limit in foreign stocks.
- For investors seeking a strategic approach within the current landscape of mutual funds in India, considering global mutual funds outside the Indian regulatory framework can provide opportunities, such as Fidelity Total International Index FTIHX, iShares Core MSCI Total International Stock ETF IXUS, and Vanguard Total International Stock ETF/Index VXUS.
- In light of the restrictions on international mutual funds, diversifying investment through hybrid/Combo Funds, like Parag Parikh Flexi Cap Fund and DSP Value Fund, can offer exposure to both Indian and international stocks, enabling global diversification while adhering to regulatory limits.
