The current market scenario around the world has scared the majority of investors and has drained millions of investors’ wealth. The immediate outcome of this is investors selling out their stakes to avoid more losses and exit the markets. However, for seasoned and opportune investors, this is the perfect time to include quality stocks that have good financial stability and growth prospects that can help them tide over this market crisis. Investing in domestic and international funds is one such opportunity that should not be missed, especially now that investment in international funds is open again.
Given below are a few details of the international funds and the recent development from SEBI relating to them.
What are international funds?
Before we go any further, let us understand the meaning of international funds and why they can be included in a portfolio. International funds are mutual funds that invest in stocks or debt instruments of companies registered and listed outside India. These funds can be classified into four major categories, namely, country funds, regional funds, global funds, and global sector funds. These funds are an excellent investment opportunity for investors with a high-risk appetite who are looking for opportunities to diversify their portfolios and gain international exposure at minimal costs. The expertise of fund managers of these funds allows the investors to invest in quality stocks at a considerably lower cost than investing in them individually.
Why was foreign investment stopped in Feb 2022 and what was its impact?
The post-pandemic period saw a huge influx of foreign investments in Indian markets as well as in international mutual funds in India. However, there are rules in place that restrict the total overseas investment in mutual funds in the country. According to the guidelines of SEBI, the overall overseas investment in the mutual fund industry is collectively restricted to up to US$7 billion.
Each mutual fund house is permitted to have a maximum foreign investment exposure of up to US$1 billion. Furthermore, Mutual fund schemes investing in ETFs (listed overseas) have a separate upper threshold of US$1 billion which is included under the overall upper limit of US$7 billion for the industry as a whole.
This overall limit of the industry was about to be breached in early 2022 and hence, SEBI had asked all mutual fund houses investing in international mutual funds to suspend any inflow of foreign investment. This impacted the fresh inflow of investment in international funds, especially for funds that did not have the option to divert towards investment in Indian securities. Fund managers had to choose between losing their recognition as international funds or waiting for foreign investments to open again. Existing SIPs, SWPs, etc were also halted unless their SID had the option to invest in Indian securities.
What is the latest amendment relating to foreign investment in international funds?
In 2022, the global markets witnessed a major correction which reduced the valuation of international stocks. Therefore, the cumulative investments made by the international mutual funds have reduced which has created a scope for fresh investments in this category. This has prompted AMFI to make a request with SEBI for permitting the inflow of foreign funds.
SEBI based on this request has reviewed its decision issued in February 2022 and allowed the inflow of foreign investments subject to certain restrictions. The directive in this regard is to allow the foreign investments without breaching the levels as of the end of the day of 1st February 2022.
Based on these revised directions, mutual fund houses like Edelweiss Mutual Fund have announced that they will start accepting the inflows into their overseas schemes. These schemes include ASEAN Equity Off-shore Fund, Greater China Equity Off-shore Fund, US Technology Equity Fund of Fund, Emerging Markets Opportunities Equity Offshore Fund, Europe Dynamic Equity Offshore Fund, US Value Equity Off-shore Fund, and MSCI India Domestic & World Healthcare 45 Index Fund.
Benefits of investing in international funds
There are many benefits of investing in international funds for Indian investors. Some of the key benefits include:
- Geographic diversification: Investing in international funds allows you to diversify your portfolio by investing in companies from different countries. This can help to reduce your risk, as the performance of your investments will not be as heavily dependent on the performance of any one country’s economy.
- Access to new investment opportunities: International funds give you access to investment opportunities that may not be available in the Indian market. This can help you to grow your portfolio and reach your financial goals faster.
- Potential for higher returns: In some cases, international funds have the potential to generate higher returns than Indian funds. This is because the global economy is more diversified than the Indian economy, and there are more opportunities for growth in developed countries.
- Professional management: International funds are managed by experienced professionals who have a deep understanding of the global markets. This can help you to make better investment decisions and reduce your risk.
Risks and considerations of investing in international funds
Investing in international funds can be a great way to diversify your portfolio and grow your wealth. However, there are some risks and considerations that Indian investors should be aware of before investing in international funds.
Here are some of the key risks and considerations:
- Currency risk: The value of foreign currencies can fluctuate, which can impact the value of your investments. For example, if you invest in a fund that invests in US stocks, and the value of the rupee falls against the dollar, the value of your investment in rupees will fall.
- Political risk: Political instability in other countries can also impact the value of your investments. For example, if there is a coup in a country where your fund invests, the value of your investment could fall sharply.
- Taxes: You may have to pay taxes on your investment gains in both India and the country where the fund is invested. This can be complicated, and it is important to understand the tax implications of investing in international funds before you invest.
How to invest in International funds
Here are the basic steps on how to invest in international funds as an Indian investor:
- Choose a fund house: There are many different fund houses that offer international funds. It is important to choose a fund house that has a good track record and that offers funds that are aligned with your investment goals and risk tolerance.
- Choose a fund: Once you have chosen a fund house, you need to choose a fund. There are many different international funds available, so it is important to compare different funds before you invest. You should consider the fund’s objective, its investment strategy, its fees, and its performance.
- Open an account: Once you have chosen a fund, you can open an account on Fisdom app as it offers access to international funds. While enrolling, you will need to provide some basic information, such as your name, address, and PAN number.
- Make a deposit: Once you have opened an account, you can make a deposit to start investing. The minimum investment amount will vary from fund to fund.
- Start investing: Once you have made a deposit, you can start investing in international funds. You can invest in a lump sum or you can invest regularly through a systematic investment plan (SIP).
The decision by SEBI is with conditions that require maintaining the investment levels as of 1st February 2022. This has created confusion as each fund house will need a different amount to reach the pre-freezing level. Also, whether SEBI direction is temporary or not lacks clarity, hence, investors need to invest with caution.
In order to resolve this issue, it would be better in the investor’s interest if SEBI and RBI would review the overall threshold for foreign investment in notified funds and increase the same. Also, the market scenario today is quite different hence, investors should invest in better-diversified funds to spread their risk and not jump to thematic funds that may have performed better earlier.
The maximum permissible investment threshold in international mutual funds for each fund house is up to US$1 billion.
The revised permissible limit for foreign investment in international mutual funds is to be capped at the levels as of 1st February 2022.
The aggregate foreign investment limit in international mutual funds is US$7 billion.
The revised foreign investments are permissible for international mutual funds that have the scope of meeting the pre-freezing levels following the redemption due to market correction. In the case of mutual funds that have not sold any stocks after SEBI put the restrictions in February 2022, such funds will not benefit from the revised directions of SEBI and cannot accept fresh inflow of funds.