Global Funds Testing Investors’ Resilience

India’s stock market, at $5.3 trillion, accounts for less than 4% of global market capitalisation. This means over 96% listed opportunities lie beyond Indian shores. This includes some of the most powerful global themes—from Silicon Valley’s AI innovations and Seoul and Taipei’s AI chips to the sparkle of American gold miners and the unstoppable rise of data centres.

The US market dwarfs others at roughly $70 trillion, followed by China ($13 trillion), Japan ($7.5 trillion), and Hong Kong ($7.2 trillion). Beyond these giants, opportunities abound across regions such as Taiwan, the UK, France, Germany, and Canada, which continue to attract global investors looking to diversify beyond domestic shores.

These markets offer unique segments. For example, the US hosts some of the most valuable companies in the world offering cutting-edge technologies. Take Santa Clara-based Nvidia, a pioneer in graphic processing units (GPUs) and accelerated computing, with a market cap of $4.6 trillion. Microsoft, Alphabet, Meta, Apple, and Tesla are some other trillion-dollar companies based in the US. Taiwan TSMC is the world’s semiconductor foundry. China’s BYD is a global electric vehicle giant.

Over the past year, international funds have delivered a 28% return on an average while domestic equity categories such as Large & Midcap, Multicap, and Flexicap delivered -1% to 4%. Three-year compound returns for domestic funds are 16–21% compared with international funds’ 25%, highlighting the benefits of a diversified, global approach.

But among international funds, too, the returns wary, underlining the importance of fund selection. Some of the largest schemes such as Motilal Oswal NASDAQ 100 ETF (Rs 10,804 crore in assets), Motilal Oswal Nasdaq 100 FOF (Rs 6,089 crore), Franklin US Opportunities Equity Active FoF (Rs 4,437 crore), Kotak US Specific Equity Passive FoF (Rs 3,717 crore), ICICI Pru US Bluechip Equity (Rs 3,344 crore) and Mirae Asset NYSE FANG+ ETF (Rs 2,347 crore) have delivered 10-74% returns.

DSP World Gold Mining Overseas Equity Omni FoF delivered 79% return during the same period. US-focused schemes did pretty well, and so did the ones with Hong Kong, Taiwan and China exposures. “These funds have done well in recent times due to a positive outlook on emerging technologies, especially AI. Most companies have backed this confidence with robust corporate earnings supported by a stronger-than-expected US economy,” says Siddharth Srivastava, Head of ETF Products & Fund Manager, Mirae Asset Investment Managers. The Chinese tech stock rally, for instance, was aided by lower valuations, policy support and some recovery in the Chinese economy, he says.

Invesco Global Consumer Trends FoF has delivered 57%, Mirae Asset Hang Seng TECH ETF FoF 45%, Nippon India Taiwan Equity 40%, Mirae Asset Global X Artificial Intelligence & Tech ETF FoF 45%, and ICICI Pru Strategic Metal and Energy Equity FoF 42% in the past year, capturing the growth in different sectors and regions globally. International funds invest in exchange traded funds (ETFs), funds of funds (FoF), or both.

One of the reasons investors are flocking to global funds is their desire to diversify geography-specific risk or reduce home market bias. The variety of stocks in the listed universe globally is also different, and some of these businesses—such as payment processors, search engines, cloud computing players, AI infrastructure providers, and industrial automation and global software giants— are not available in the domestic market.

“Valuations across sectors are also different in global markets. Valuations of consumer businesses in India are relatively higher than their global peers,” says Raunak Onkar, Fund Manager & Research Head of PPFAS Mutual Fund, who manages the foreign investment component of India’s largest flexicap fund. He explains that the short-term performance of global stocks could attract investors towards global funds but cautions against treating equities as a short-term asset class. “The holding period needs to be longer (5+ years). Only then should they consider investing globally as well,” says Onkar.

Onkar’s Parag Parikh Flexi Cap manages assets of Rs 1.19 lakh crore. There are also other big MF schemes such as SBI Focused Equity Fund, SBI Technology Opportunity Fund, DSP Multi Assets Allocation Fund and Kotak Pioneer Fund that invest 10-20% funds into foreign stocks. For example, SBI Focused Equity has Alphabet as its biggest equity bet at 7.77%; DSP Multi Assets Allocation Fund’s 19.5% foreign portfolio has stocks such as SK Hynix Inc, Alibaba Group Holding, Microsoft Corp, Tencent Holdings and Novo Nordisk ADR (a global healthcare company). Overseas mutual fund units accounted for 17.23% of Kotak Pioneer Fund’s assets as of September 30. Parag Parikh Flexi Cap has Alphabet, Microsoft and Amazon.

At present, 66 international funds manage Rs 72,329 crore assets in India. Of these, 23 are accepting lump-sum and fresh SIP investments. These include Axis Greater China Equity, Kotak Global Emerging Market Overseas Equity Omni, Edelweiss ASEAN Equity Offshore, Franklin Asian Equity, HSBC Brazil, and PGIM India Emerging Markets Equity, among others. Invesco MF suspended subscriptions to three of its international funds effective October 9.

Since February 2022, the domestic mutual fund industry has exceeded the Reserve Bank of India (RBI)-prescribed remittance limit of $7 billion. There is also $1 billion limit for individual mutual fund houses. This restricts domestic mutual funds in India from investing further in global stocks. The schemes open for subscription only when there is some redemption. This applies to international funds as well as funds investing in global stocks. Among international funds, most of the large ones are not accepting fresh investments. These include Motilal Oswal Nasdaq 100 FOF, Kotak US Specific Equity Passive FoF overview, ICICI Pru US Bluechip. All overseas schemes of Mirae Asset Mutual Fund are also closed for fresh lump-sum investments and new SIPs because of the RBI limits.

In case of funds investing in overseas stocks, Parag Parikh Flexicap Fund had close to 11% exposure to global businesses, as of August 30, against the permitted 35%. This fund, like many others, is allowed to reshuffle its foreign portfolio. Additionally, any dividends it earns from these global businesses can be reinvested without affecting the overall RBI remittance limit.

International funds also have fewer compliance hassles. Direct US stock investments involve currency conversion calculations, 20% tax collected at source (TCS)on remittances, and foreign withholding tax claims, whereas in FoFs, the AMC does all the heavy lifting in the background, says Amit Baid, Head of Tax at BTG Advaya.

Effective April 2025, capital gains treatment is identical in both routes; short-term gains of less than 24 months are taxed at slab rates, and long-term gains over equal or over 24 months at 12.5% without indexation. For example, if an investor invested Rs 10,000 in a FoF tracking the S&P 500 and exited after 2 years at Rs 15,000, the Rs 5,000 gain is taxed at 12.5%, says Baid. The same applies if an investor had directly bought Apple shares for the equivalent amount and sold later, except the same investor would also need to factor in currency conversion while computing taxes.

“Where the difference really shows is in compliance. Direct US stock purchases fall under RBI’s LRS and attract 20% TCS on remittances above Rs10 lakh. FoFs, being rupee-based, avoid LRS and TCS. Dividends also differ: US stocks face a 25% withholding tax, requiring Indian investors to claim a foreign tax credit. With FoFs, the AMC handles dividends, and the investor simply pays tax in India like any other mutual fund. In short, international FoFs provide global exposure without the operational friction,” says Baid.

Funds with up to 35% overseas equity exposure, such as Parag Parikh Flexicap, continue to be treated as domestic equity funds. From FY2025-26 onward, short-term gains of less than or equal to one year are taxed at 20%, and long-term gains over one year are taxed at 12.5% with a Rs1.25 lakh annual exemption, making them relatively more tax-efficient than pure international FoFs.

Despite the popularity of these funds, experts caution against the fear of missing out. The investable universe globally needs to be reasonably valued for investors to diversify.

@amit_mudgill