Domestic Mutual Funds with Foreign Assets: What Investors Need to Know SEBI's $7 billion cap on foreign investments has limited international diversification for Indian investors, but some domestic mutual funds with overseas assets remain an option. These funds offer a way to gain exposure to global markets, but investors must be aware of dilution risks, inconsistent allocation, and the potential for new investments to be directed toward domestic stocks. In February 2022, the Securities and Exchange Board of India (SEBI) directed asset management companies (AMCs) to stop accepting fresh inflows into international mutual funds. The reason: the industry had exhausted the $7 billion overseas investment limit set by the Reserve Bank of India (RBI). Since then, many retail investors seeking international diversification have faced limited choices. However, a handful of domestic mutual funds with some overseas equity exposure remain open for investment, albeit with important caveats. “These funds historically had some international exposure, but new investments may not be going into the same US stocks anymore,” explains Kartik Sankaran, AMFI Registered Distributor and Founder of Fiscal Fitness. He adds that even the existing exposure may gradually reduce as inflows are being directed toward domestic stocks instead. “Investors need to be mindful of the dilution risk.”
Funds with significant exposure Among the notable funds with relatively high overseas exposure are Edelweiss MSCI India Domestic & World Healthcare 45 Index Fund (26.87% overseas assets), Edelweiss Technology Fund (26.81%), and DSP Value Fund (25.38%). These schemes continue to offer some access to global equities, but their foreign allocation fluctuates. “The percentage keeps changing. Compare that to a pure NASDAQ 100 fund, which will always track the US tech market,” says Sankaran. He warns that lower-exposure funds aren’t a genuine way to play international diversification and suggests focusing on funds with significant overseas exposure while carefully monitoring dilution risk.
On the other hand, Abhishek Kumar, SEBI Registered Investment Advisor and Founder of SahajMoney, highlights the strategic benefits of these funds. “These funds provide a simple way for domestic investors to invest in global markets. Few of these funds invest as high as 30% of their AUM in global markets and provide an opportunity to reduce country and currency specific risk through diversification of domestic investors’ portfolio,” he says. Kumar stresses that reducing portfolio risk through diversification is the biggest benefit investors can gain by investing in such funds. “This could be achieved through both multi-asset funds or equity funds, but investors are advised to consider the percentage allocation of AUM by these funds into global markets, as that would impact volatility and the investment cap imposed by the regulator,” he explains.
He further advises investors to carefully evaluate each fund’s expense ratio, fund manager’s track record, and top holdings—such as Nvidia, Microsoft, Eli Lilly, or global ETFs—to ensure these stock holdings fit their risk appetite. “Additionally, investors should check the consistency of overseas allocation over time and ensure these allocations complement their overall asset allocation rather than simply chasing higher short-term returns,” adds Kumar.
Some alternatives As alternatives, Gift City retail options and new products from DSP and Parag Parikh have emerged, though these options currently lack a track record. Sankaran adds, “DSP recently launched a retail outbound fund, while Parag Parikh has introduced a new portfolio management service (PMS) focused on global equities. But none of these have a one-year or three-year track record yet, so it’s hard to assess their true value.” Gold remains another way for Indian investors to hold a dollar asset, as it is priced in US dollars. Final thoughts
For those seeking more control, Sankaran suggests opening an international brokerage account to invest in ETFs offers transparency and consistency, albeit with more effort. “The process is more cumbersome but manageable depending on the ticket size,” He explains. Investors who wish to play the international diversification card should focus on funds with significant foreign exposure, assess the consistency of allocation over time, and weigh the dilution risks carefully
Source:https://thefynprint.com/global-investing/domestic-mutual-fu nds-with-foreign-assets-what-investors-need-to-know?id=6 8cb690ba9db3c0a823c2ad8
