Investing abroad has picked up pace in recent years. Today, there are multiple ways to invest in foreign stocks or international ETFs (Exchange-traded funds). But one of the most convenient and easy routes is through mutual funds. However, it can be a daunting task for you to find the best international funds for yourself as there are 67 different international funds in this category.
In this blog, we will explain how you should choose the best international ETF for you. But before we start, you need to know about the recent restrictions put by SEBI on overseas investments.
Ban on Mutual Funds From Investing in Foreign Stocks
Currently, SEBI (Securities And Exchange Board of India) has restricted mutual funds from investing in international stocks.
According to a SEBI circular issued on June 3, 2022, Mutual Funds can make overseas investments subject to a maximum of USD 1 billion per fund house, within the overall industry limit of USD 7 billion.
By January, the mutual fund industry had reached the prescribed limit. From February 2, most funds investing abroad stopped taking fresh investments. Recently, some funds have started taking fresh investments as global markets have corrected. But the overall limit has not been increased yet. This means the funds may close the subscription again.
There is a separate limit for funds that invest in ETFs. Each fund can invest a maximum of USD 300 million. The overall industry limit, in this case, is USD 1 billion.
So, for now, investors can buy the Indian Fund of Funds (FoFs) that invest in international ETFs. Although these ETFs are available, they are existing units with investors who had purchased them earlier. So, investors may see all ETFs on the exchanges. But they need to ensure those ETFs are not trading at a premium.
The ban may be lifted whenever the Reserve Bank of India (RBI) increases the investment limit in foreign stocks. Meanwhile, let’s understand how you can choose the right international fund for yourself.
Investment Options Under International ETFs
Indian mutual funds offer a variety of options under the international ETFs umbrella.
There are funds focused on regions like emerging markets, ASEAN, Europe, Asia Pacific (ex-Japan) or global opportunities funds. Then there are country-specific funds playing mainly on Brazil, China, Japan, and US equities. Some funds also focus on various themes like real estate, commodities, etc.
However, investing in any thematic or region-specific fund won’t be advisable as the risk will be higher.
Among countries, the US-focused funds are likely to offer better diversification as US-based companies are global market leaders. For example, Alphabet, Facebook, Netflix, etc. Plus, US Stock markets are less correlated to Indian stock markets. Thus investing in a global market less correlated to Indian stock markets will offer better diversification.
Ways To Invest in US-based International Funds
Let’s first understand the different ways in which an Indian investor can take exposure to the international markets via mutual funds.
First, there are active funds like ICICI Prudential US Bluechip Equity. As the name suggests, its focus is US stocks. It works like an actively managed equity fund in India. The fund managers directly invest in stocks in the US market.
Second, there are passive funds like Motilal Oswal S&P 500 Index Fund and Mirae Asset NYSE FANG+ ETF. Indian fund houses manage these schemes.
Third, funds like Parag Parikh Flexi Cap, DSP Value Fund, or Axis Growth Opportunities Fund invest a part of their portfolio in international stocks. However, they maintain at least 65% equity exposure to Indian stocks.,
Fourth, there is a category called funds of funds. These funds take money from Indian investors and invest in existing international ETFs. Currently, investment is available in this category only. Let’s explore the various options.
International ETFs: Available Options
These international ETFs are fund-of-funds (FoFs) that take money from Indian investors and invest in ETFs listed on foreign exchanges. The following table has the options.
| International ETFs Currently Available For Investments | ||
| Scheme | Launch date | AUM (Rs cr) |
| Aditya Birla Sun Life NASDAQ 100 FOF | Nov-2021 | 71 |
| Invesco India – Invesco EQQQ NASDAQ-100 ETF FoF | Apr-22 | 60 |
| Kotak Nasdaq 100 FOF | Feb-21 | 1113 |
| Navi US Total Stock Market Fund of Fund | Feb-22 | 205 |
| Navi Nasdaq 100 Fund of Fund | Mar-22 | 115 |
How To Choose The Best International ETF?
Most ETF FoFs open for a subscription right now invest in the Nasdaq 100 index. That’s a thematic index focused on tech stocks.
So, while there are options available to invest abroad, especially in markets like the US, it’s focused on tech. Most of them are recently launched and don’t have a one-year history.
You can use these international ETFs if you previously had an allocation to the tech stocks and want to maintain the allocation.
Ideally, you should invest in a broader index like S&P 100 or S&P 500.
Only Navi currently offers FoF that invests in Vanguard Total Stock Market ETF, which takes exposure to more than 4,000 stocks. The top 10 stocks in this fund have 25% weight.
Investors can also buy units of international ETFs, which are run by Indian fund houses. They buy international stocks directly and offer ETFs to Indian investors. Examples of these funds are Motilal Oswal S&P 500 Index Fund and Mirae Asset NYSE FANG+ ETF. However, these funds may be trading at a premium due to increased demand. It is not recommended to invest in these ETFs at a premium.
