Chapter 13 of 15
International Mutual Funds
Invest in Apple, Google from India. Currency risk and SEBI caps.
Arjun noticed something puzzling in 2022: his Indian equity portfolio was down 5%, but his friend Suresh — who had a 15% allocation to international funds — was up 8% for the year. The secret ingredient was the US dollar. When Indian markets fell, the rupee also weakened against the dollar, which meant Suresh's US fund investments, even though US markets were flat, had delivered solid returns in Indian rupee terms simply due to currency movement. International funds add a unique dimension to an Indian investor's portfolio that most people completely miss.
Why Indian Investors Should Consider International Funds
There are three compelling reasons to add international exposure to an Indian portfolio:
Access to businesses not available in India: Google/Alphabet, Microsoft, Amazon, Apple, Nvidia — none of these are investable through Indian stock markets. International funds give you ownership in the world's most powerful companies.
Rupee depreciation as a return booster: The Indian rupee has historically depreciated against the US dollar at roughly 3–5% per year. This currency depreciation automatically adds to your returns when investing in dollar-denominated assets.
Geographic diversification: Indian markets represent only about 3–4% of world stock market capitalisation. Holding only Indian equity means 96% of global wealth creation opportunities are missed. International funds capture the rest.
How Currency Movement Affects Returns
Anita invested ₹10,000 in a US S&P 500 fund when 1 USD = ₹70:
- Investment in USD = ₹10,000 ÷ ₹70 = $142.86
- After 2 years, S&P 500 grew 15%. USD value = $142.86 × 1.15 = $164.29
- By this time, 1 USD has risen to ₹85 (INR depreciated)
- Value in INR = $164.29 × ₹85 = ₹13,965
- Actual INR return = 39.65% even though the underlying US market only grew 15%
The ₹15 depreciation from ₹70 to ₹85 (21.4% currency movement) combined with the 15% US market return to deliver 39.65% returns in INR. This is the structural tailwind of investing internationally from India — the long-run trend of INR depreciation consistently adds 3–5% p.a. to returns from USD-denominated assets.
The reverse is also true: if the INR strengthens (unusual but possible), your USD returns shrink when converted to INR. This two-way nature is currency risk.
The SEBI Overseas Investment Cap
SEBI has set a total industry-wide limit of $7 billion (approximately ₹58,000 crore) for overseas investments by Indian mutual funds. This limit was breached in early 2022, and SEBI directed all AMCs to stop accepting fresh lumpsum investments and new SIPs in international funds until further notice. As of 2026, some funds have partially reopened (allowing limited lumpsum but not new SIPs, or vice versa), but the restriction is periodically reimposed when the industry approaches the limit. Always check with your platform (Groww, Zerodha) before trying to start an international fund SIP — it may or may not be available depending on current utilisation of the $7 billion limit.
Indian Equity vs International Fund: 2015–2025 Perspective
| Feature | Indian Equity Fund | International Fund (US-focused) |
|---|---|---|
| 10-year CAGR (approx, INR)* | 11–14% | 14–18% (including INR depreciation benefit) |
| Currency Impact | None (INR returns) | Positive when INR depreciates (~3–5% tailwind) |
| Taxation | STCG 20%, LTCG 12.5% above ₹1.25L | Debt fund rules — taxed as income at slab rate |
| Expense Ratio (Direct) | 0.3–1.0% | 0.8–1.5% (higher due to FoF structure) |
| SEBI Investment Restrictions | None | Subject to $7 billion industry cap |
| Best Exposure | India growth story | US tech, global diversification, USD hedge |
| Liquidity | T+1 days | T+3 to T+5 days (some funds) |
Past performance disclaimer: Returns are approximate historical ranges and are not guaranteed. International fund returns are additionally subject to currency and geopolitical risks.
Taxation of International Funds
Unlike Indian equity funds, international mutual funds are treated as debt funds for taxation purposes (since they hold <35% in Indian equity). Under the Finance Act 2023 rules:
- All gains (regardless of holding period) are added to your income and taxed at your applicable income tax slab rate.
- There is no separate LTCG benefit or indexed cost benefit for international funds.
- This makes international funds less tax-efficient than Indian equity funds, but the potentially higher USD-linked returns can still justify the allocation for long-term diversification.
Most Indian financial planners suggest allocating 10–15% of your equity portfolio to international funds for geographic diversification and the structural INR depreciation tailwind. Popular options include funds tracking S&P 500 (Motilal Oswal S&P 500 Index Fund), NASDAQ 100 (Motilal Oswal NASDAQ 100 ETF), and global diversified options. Always double-check that the fund is currently accepting fresh investments given the SEBI cap.
An Indian investor's international US fund showed 0% growth in USD terms over 1 year. However, the USD rose from ₹80 to ₹84 (5% depreciation of INR). What is their return in INR terms?
Key Takeaways
- International funds give Indian investors access to companies like Google, Microsoft, and Amazon — unavailable on Indian exchanges — plus geographic diversification across 96% of world market cap.
- INR's long-term depreciation (~3–5% p.a. against USD) acts as a structural return booster for international fund investors, adding to their INR returns even when US markets are flat.
- SEBI has imposed a $7 billion industry cap on overseas mutual fund investments — always verify that fresh investments are open before starting a new international fund SIP.
- International funds are taxed like debt funds (income tax slab rate on all gains) — less tax-efficient than Indian equity funds (12.5% LTCG), so factor this in when calculating net returns.