After a year in which international equities outperformed domestic markets, more investors are waking up to the importance of global diversification. However, with the regulatory overseas investment ceiling, the options are limited.
The Securities and Exchange Board of India (Sebi) and the Reserve Bank of India have set an overseas investment ceiling of $7 billion for the entire mutual fund industry and $1 billion per asset management company. Once these limits are reached, funds will have to stop fresh inflows.
Global schemes allow investors to tap opportunities across markets worldwide. The category has grown sharply, from just one scheme in 2007 to more than 60 today, with assets under management rising manifold. But because of the regulatory cap, many funds must close subscriptions once they exhaust their overseas allocation.
Strong demand has also pushed international exchange-traded funds (ETFs) to trade at a premium to domestic ETFs. ETF providers in India cannot create new units because they, too, have reached the overseas investment limit, creating a demand-supply mismatch. As a result, existing ETF units are trading above their indicative net asset value (iNAV), which reflects the real-time value of the fund’s underlying holdings.
Juzer Gabajiwala, director at Ventura Securities, said the moment overseas limits reopen, the inflated price is likely to drift back toward fair value.
According to National Stock Exchange of India data, some ETFs are trading at premiums of up to 20%, as of 11.05 am on Wednesday.
Given this gap, experts suggest considering alternatives such as active international funds that are still open for subscription. can also invest through outbound funds based in Gift City or directly buy global stocks and ETFs under the Liberalised Remittance Scheme, which allows individuals to remit up to $250,000 per financial year (April-March) for purposes such as overseas education, medical expenses and investments in foreign stocks and property.
Last week, PPFAS Mutual Fund announced the launch of two new outbound index fund-of-funds (FoFs) from Gift City’s International Financial Services Centre (IFSC). These will invest predominantly in ETFs or Units of Collective Investment in Transferable Securities (UCIT) funds tracking global US indices.
Last year, DSP Asset Managers launched its Global Equity Fund, the first retail-focused offshore fund. BNP Paribas also has a Gift US Small Cap Fund and Edelweiss launched its Greater China Equity Fund in February.
Going global
These funds give Indian investors direct exposure to the US equity markets without needing a foreign brokerage account. Platforms like Vested Money, INDMoney, Ticker Tape and Paasa allow direct investment in global stocks as well as ETFs, but this involves foreign exchange conversion fees and potential brokerage charges.
All—except those made through Gift City—must be reported under Schedule FA (Foreign Assets) in the income-tax return.
Premiums on some ETFs have begun to ease. Two Nasdaq-linked ETFs were trading at around a 6% premium and another at its net asset value, respectively, at the time of writing. However, an ETF linked to the broader S&P 500 was still trading at a 19% premium.
According to Sonam Srivastava, founder and fund manager at Wright Research PMS, while technically a lower premium is a good time to invest for long-term allocation, investors should brace for increased volatility given the West Asia tensions. She noted that the money has moved to emerging markets from the US, but the focus has now shifted to war, creating a risk-off sentiment toward emerging markets.
Kalpen Parekh, managing director and chief executive officer of DSP Mutual Fund, said in a LinkedIn post that the romance for global investing is increasing in India, chasing recent high returns. He added that these stocks also fall and highlighted that the stocks in its global equity funds are sharply lower from their peaks, yet global investing done with the right principles makes sense. He added that investing in a single country is more harmful if done by just looking at past one-year returns.
Hariharan Asokkumar, a Sebi-registered investment adviser believes that many Indian investors tend to think mainly about the domestic market and the US market when considering equities but the global opportunity set is much wider. “Economies like Japan, South Korea and even emerging manufacturing hubs like Vietnam have been doing quite well in recent years,” he said.
The growing demand for global diversification is understandable, and to some extent, that demand can make investors comfortable paying a small premium for access to global exposure, but investors should still be mindful of how much premium they are paying, Asokkumar added. “Even in times of geopolitical tensions, diversification across geographies can actually help reduce concentration risk rather than increase it,” he said.