Overseas equity mutual funds outperform as Indian stock market slumps

With the stock markets in a tailspin, most equity mutual fund (MF) categories have come up with a poor show in the last one year. But MFs investing in overseas markets and global ETFs (Exchange Traded Funds) have bucked the trend delivering a strong performance in the past year and have also managed to post positive returns so far in 2026.

Equity MFs, which invest in global markets and ETFs, have surged 55.2% on an average in the one-year timeframe and provided 6.7% returns on an annualised basis so far in 2026 (as on April 10). “The primary reason behind the strong performance of overseas equity mutual funds is the relative underperformance of Indian markets over the past year compared to global peers,” said Sachin Jain, managing partner, Scripbox, a leading digital wealth manager.

Equity MFs investing in overseas markets have gained 23% on an annualised basis during the three-year timeframe and 10.5% in the five-year timeframe. In contrast, the Nifty-50 delivered a CAGR (Compounded Annual Growth Rate) of 10.5% in three years and 10.9% in five years.

“Markets such as China, South Korea, the US, and parts of Europe have delivered stronger returns, which have directly benefited funds with international exposure. Additionally, the depreciation of the Indian rupee has acted as a tailwind, enhancing returns for Indian investors investing abroad,” he said.

“The rally in US equities, particularly in technology, AI, and semiconductor companies, has been a key contributor, as many international funds have meaningful exposure to these sectors,” said Rajani Tandale, senior vice president, mutual fund, 1 Finance, a personal finance advisory firm. “Certain commodity-linked themes have also played a significant role. Funds focused on global mining and gold have delivered exceptional returns, benefiting from rising commodity prices, safe-haven demand, and global macro (economic) uncertainty,” he said.

The Nifty 50 Index has advanced by only 4.5% over the past year and has declined 8.7% so far in 2026. In contrast, the S&P 500 Index has gained 27.1%, the NYSE Composite Index by 24.8%, FTSE 100 Index by 33.1% and Hang Seng Index by 22.7% in the last one year. All these indices have dropped only marginally so far in 2026.

Global equity MFs invest in an eclectic mix of companies that are based in the US, China, Japan, Europe, Taiwan and the ASEAN region. They also invest in global indices such as NASDAQ 100, S&P 500 and the Hang Seng and in themes such as mining stocks, FAANG stocks (a group that includes technology giants such as Nvidia, Apple, Google (Alphabet), Facebook (Meta) and Microsoft).

Equity MFs that have exposure to global markets provide good diversification to a portfolio, say experts. “From a diversification standpoint, global equity funds do add value to a portfolio. But investors should focus on maintaining a well-diversified portfolio and stick to asset allocation,” Jain said.

Can these funds sustain their performance?

“If international markets continue to outperform, these funds may maintain their momentum,” Jain said. “Much of the recent outperformance is cyclical, driven by sector-specific rallies, commodity upcycles, and currency tailwinds, which are unlikely to persist at the same pace,” Tandale said.

“Valuations in key global markets, especially the US, have expanded meaningfully, which could cap future returns or increase the probability of corrections,” he said. “Historically, Indian equities have been among the top-performing markets globally and often trade at a premium. Over the long term, they have outperformed many global counterparts,” Jain said.

What are the risks associated with these funds?

“Global markets operate under very different economic, political, and sectoral dynamics, which may not always be fully understood by Indian investors. Investing in such markets can therefore mean exposure to unfamiliar risks. Currency volatility, geopolitical factors, and varying market structures further add to the complexity,” Jain said.

“Global macro (economic) factors such as interest rates, geopolitical developments, and capital flow dynamics can introduce volatility. Currency risk can work both ways and any appreciation in the rupee may reduce returns,” Tandale said. Another key constraint is the regulatory cap set by markets regulator SEBI on overseas investments by equity MFs, which can lead to restrictions on fresh inflows once the limit is reached. This reduces flexibility for investors.

SEBI has imposed industry-wise cap wherein mutual funds can invest only up to $7 billion in a year in foreign stocks. Each MF is allowed a sub-limit of $1billion within this overall cap. MFs have to suspend SIPs and lumpsum investments if they hit this ceiling. But as of now they are accepting inflows as they are yet to breach the limits. “Regulatory limits on overseas investments can affect fund flows and availability,” experts said.

How much of the portfolio can investors allocate towards such funds?

“It is more suitable for aggressive investors who understand global market dynamics. Allocation should be conservative and should not exceed 10%-15% of the overall portfolio. The idea is to use these funds as a diversification tool rather than as a core investment strategy,” Jain said.

“Overseas equity funds are best viewed as a strategic diversification tool rather than a core holding or a short-term return play. A balanced allocation of around 10% to 20% of an overall portfolio is generally reasonable, depending on an investor’s risk appetite and time horizon,” Tandale said. “Investment decisions should be taken as part of a holistic financial plan, considering overall asset allocation, goals, and risk profile,” he said.