Chapter 13 of 15
International Mutual Funds
Invest in Apple, Google from India. Currency risk and SEBI caps.
Parun opened his old investment account from Germany. The one he hadn't touched in a year since returning to India.
Three ETFs. iShares MSCI World. Vanguard S&P 500. An emerging markets fund. All neatly growing in euros, tracking global markets.
He'd closed those positions before leaving Munich, tax implications of holding foreign accounts while being Indian resident, his German accountant had advised. But the returns had been good. Steady. Diversified beyond just India.
Now he was asking: can I get that global exposure from here?
The answer, it turns out, is yes. With some important catches.
An international or global mutual fund is a mutual fund registered in India that invests in stocks of companies listed outside India, in the US, Europe, or other global markets, giving Indian investors exposure to foreign markets without opening an international brokerage account.
Why Would a Parun-Type Investor Want Global Exposure?
When Parun had 40% of his portfolio in global index ETFs in Germany, he wasn't just chasing returns. He was managing risk.
The Indian stock market and the US stock market don't always move together. When India goes through a domestic political crisis or monsoon failure, US tech stocks keep running. When a global recession hits, both fall, but not always by the same amount or at the same speed.
Global diversification reduces the correlation of your portfolio to any single country's economy. For a serious investor, this matters.
Beyond risk: India is a growing economy, but the world's most innovative and valuable companies, Apple, Microsoft, Google, Nvidia, Tesla, are listed in the US. Indian mutual funds investing in these companies let you ride their growth.
How Do International Funds Work in India?
There are two main structures:
Fund of Funds (FoF): An Indian AMC runs a fund that invests in a foreign mutual fund or ETF, say, a Mirae Asset fund that buys units of Mirae's Korean fund, which then invests in global markets. You're two layers removed from the actual stocks.
Direct international funds: Indian AMCs like PPFAS (Parag Parikh Flexi Cap) directly hold foreign stocks (Apple, Alphabet, Amazon) within the fund itself. This is usually more efficient than FoF.
| Structure | Examples | Expense ratio | Tax treatment |
|---|---|---|---|
| Direct international fund | Parag Parikh Flexi Cap (has US stocks) | Lower | Equity if 65%+ in Indian equity |
| FoF (investing in foreign ETF) | Motilal Oswal Nasdaq 100, Franklin US Feeder | Higher (two layers) | Debt fund tax (slab rate) |
| Thematic global fund | DSP World Mining, Kotak Global Innovation | Varies | Debt fund tax usually |
In 2022, SEBI imposed an industry-wide limit of USD 7 billion for overseas investments by Indian mutual funds. Several international funds (Motilal Oswal Nasdaq 100, etc.) had to temporarily suspend new investments or SIPs because they hit the limit. This limit has eased since, but it's a structural risk for international funds, check if your chosen fund is accepting fresh investments.
Taxation of International Funds: The Critical Detail
This is the part that surprises most people.
If the fund has 65%+ of its portfolio in Indian equities, it gets equity taxation: LTCG (12+ months) at 12.5% above ₹1.25L, STCG at 20%.
If the fund has less than 65% in Indian equities (most "pure" international funds), it gets debt taxation, gains taxed at your slab rate regardless of holding period.
This is a significant disadvantage. Parug Parikh Flexi Cap (which holds US stocks alongside Indian stocks, maintaining 65%+ Indian equity) gets equity taxation. A pure Nasdaq 100 FoF does not.
Option A: Parag Parikh Flexi Cap (65%+ Indian equity, some Apple/Google/Amazon) Hold for 2 years, gain ₹1 lakh. Tax: Equity LTCG, within ₹1.25L exemption → ₹0 tax.
Option B: Motilal Oswal Nasdaq 100 FoF (pure US exposure) Hold for 2 years, gain ₹1 lakh. Tax: Slab rate (Parun is in 30% bracket) → ₹30,000 tax.
Same gain. Option A: ₹0 tax. Option B: ₹30,000 tax. The tax treatment alone makes hybrid funds like PPFAS more attractive for most investors.
Currency Risk: The Variable Nobody Talks About Enough
When Parun invests in a Nasdaq 100 fund, his returns depend on two things:
- How the US stocks perform (in USD)
- How the USD/INR exchange rate moves
If the Nasdaq goes up 15% in USD but the rupee strengthens 5% against the dollar, your return in rupees is only ~10%.
Conversely, if the Nasdaq goes up 10% in USD and the rupee weakens 5%, your rupee return is ~15%.
The rupee has historically depreciated against the dollar over long periods (INR went from ~45/USD in 2000 to ~84/USD in 2025). This depreciation has historically been a tailwind for international fund returns, your dollar-denominated gains convert to more rupees when you sell.
Over 20 years, the rupee has depreciated roughly 3–4% per year against the USD on average. For investors in US equity funds, this has been an additional return on top of the stock market gains. It's not guaranteed, currency can move either way, but the structural current account deficit suggests this trend may continue.
What International Funds Should Parun Consider?
Given Parun's situation (high sophistication, 20+ year horizon, wants genuine global diversification):
| Fund type | What it gives | Tax efficiency | Parun rating |
|---|---|---|---|
| Parag Parikh Flexi Cap | India + US large cap (Apple, Alphabet) | Equity (65%+ Indian) | High, equity tax + good track record |
| Nasdaq 100 FoF | Pure US tech (Apple, Microsoft, Nvidia, Google) | Debt tax (slab rate) | Medium, great exposure, poor tax |
| S&P 500 FoF | Broad US market 500 companies | Debt tax (slab rate) | Medium, broad, but tax drag |
| MSCI World FoF | Global developed markets (US, Europe, Japan) | Debt tax | Low, most comprehensive, worst tax |
| Thematic global (AI, EV, etc.) | Narrow sector bet | Debt tax usually | Low, too concentrated for core |
Parun's conclusion: Allocate 10–15% of his portfolio to global exposure via PPFAS Flexi Cap (efficient, equity taxed, proven manager) plus a small allocation to Nasdaq 100 FoF for pure US tech exposure, accepting the debt tax treatment as a cost of that exposure.
How Much Global Exposure Makes Sense?
There's no universal answer, but guidelines:
- 5–10% global: Meaningful diversification without overexposure
- 15–20% global: Significant international tilt, suitable for sophisticated investors
- >25% global: High concentration in foreign economies: consider only if you have specific reasons
Parun's 15% global allocation (10% PPFAS + 5% Nasdaq FoF) is within a sensible range.
US markets, particularly tech (Nasdaq), had exceptional returns in 2023–2024. International funds became trending. Many Indian investors piled in at peak US valuations. Currency movements and US valuation cycles can create significant short-term losses. International funds are for long-term strategic diversification, not for chasing recent performance.
Liberalised Remittance Scheme (LRS): The Alternative
Parun could also invest directly in US/global stocks via LRS, the RBI's scheme allowing residents to invest up to USD 2,50,000/year abroad.
With LRS, he could open an account with Vested, INDmoney, or a foreign broker and buy actual US ETFs (like Vanguard S&P 500) exactly as he did in Munich.
LRS pros: Direct ownership of global ETFs, lower expense ratios, full market exposure LRS cons: Foreign account compliance, TCS (Tax Collected at Source) at 20% on remittance above ₹7 lakh/year (refundable via ITR but cash flow impact), complex ITR reporting (Schedule FA, Schedule FSI)
For most investors, Indian mutual funds with international exposure are simpler. For sophisticated investors like Parun who are comfortable with compliance, LRS + direct foreign ETFs can make sense for a portion.
Key Takeaways
- Indian mutual funds with international exposure let you invest in US/global stocks without foreign brokerage accounts
- Tax trap: Most pure international funds (Nasdaq 100, S&P 500 FoF) are taxed at slab rate: not equity LTCG rates
- Funds that maintain 65%+ Indian equity (like PPFAS Flexi Cap) retain equity LTCG taxation
- Currency risk cuts both ways: rupee depreciation historically boosted international fund returns in rupee terms
- Keep global allocation at 10–20% for diversification; avoid chasing recent US market performance
- LRS (direct international investing) is an alternative for sophisticated investors comfortable with compliance
Compare your options:
- Portfolio construction: Parun's complete portfolio including global allocation
- Advanced strategies: managing a multi-asset, multi-currency portfolio
- Index vs active funds: does the same data apply globally?
Parun invests in a Nasdaq 100 Fund of Funds. He holds it for 3 years and makes ₹2 lakh profit. He's in the 30% tax bracket. How is this taxed?
Disclaimer: This article is for educational purposes only and does not constitute personalized financial advice. Investments are subject to market risks. Past performance does not guarantee future returns. Please consult a SEBI-registered investment adviser before making investment decisions.