With mutual funds still constrained by overseas investing limits and international exchange-traded funds (ETFs) trading at premiums on domestic exchanges, the usual paths to global diversification remain limited. Here’s a look at some options.
Feeder funds
Among domestic mutual funds, there are some feeder funds that remain open for subscription. These are funds that invest in international funds. Hence, these are called fund of funds.
“However, the underlying funds are actively managed and do not offer the same comfort as investing in a broad index, where there is no risk of a fund manager underperforming the benchmark,” said Vishal Dhawan, founder of Plan Ahead Wealth Advisors. “Earlier, investors could rely on funds tracking broad-based ETFs and indices, but those options are currently limited due to overseas investing restrictions.”
Remember, funds that are still open have limited headroom to invest overseas, so keep an eye out for fund announcements that indicate any breach of this headroom.
Through foreign-broker route
Foreign broker platforms provide an alternative path to investing in US equities and ETFs. Here, client holdings—fractional or whole—sit in pooled omnibus accounts under global custodians. Platforms such as Vested and INDMoney operate on this model. These platforms also provide access to exchange-traded funds listed on overseas exchanges, allowing investors to track a diversified index.
Fractional shares work differently in this route. Investors buy a fraction of the stock’s value directly. For instance, if a share trades at $270, an investor can buy one-tenth for $27 or any other fraction.
The platform aggregates investor orders, buys full shares through a US brokerage account and allocates proportional fractions to each investor. These fractions are reflected in the investor’s account, and any dividends are credited in proportion to the fraction held. This structure allows investors to participate in price movements and corporate actions without buying a full share.
However, note that the underlying investments are not held in the investor’s own demat account, but in the accounts of the platform’s foreign broker partners, with the investor being the beneficiary. But, these investments are insured in US by the Securities Investor Protection Corporation (SIPC) up to $500,000.
Gift City funds
As of now, there is only one retail outbound fund on Gift City, which was launched by DSP MF. The minimum investment in DSP’s retail fund is $5,000 (around ₹4.5 lakh), with incremental investments of $500.
This fund is available on Vested and IndMoney. However, it differs in terms of taxation. The tax impact occurs at the fund level, not the investor level.
For example, if a dividend is received from an investee company, the fund must pay tax at a marginal tax rate of 35.88%. If there is a short-term gain from an investment (when the holding period is less than two years), the fund will pay a short-term capital gains tax rate of 42.74%. Long-term capital gains are taxed at a rate of 14.95% at the fund level.
To mitigate this tax impact, the fund will maintain a cash reserve of 4-5% to facilitate exits, thereby avoiding the need to sell investee shares in the short term to meet investor redemptions. The fund will also levy an exit load on investors exiting before two years, which will be added to the fund. Recently, PPFAS received approval to launch two new retail passive funds, Gift City-based outbound funds—Parag Parikh IFSC S&P 500 FOF and Parag Parikh IFSC Nasdaq 100 FOF, but the fund house is yet to officially launch their funds.
Global funds
Another route for global exposure is through international mutual funds. These are professionally managed funds that invest across various markets, including the US, Europe, Asia, and emerging economies. Vested has begun offering global funds that are domiciled in regulated jurisdictions, such as Ireland and Luxembourg, which are widely used for cross-border fund distribution. These structures allow Indian investors to participate in global equity or fixed-income strategies without the complexity of selecting individual stocks.
The process is digital: investors complete a one-time KYC, link a bank account and remit money in dollars. “Global managers such as BlackRock, Vanguard, Fidelity and Pimco are available, and investors can start with small ticket sizes—some as low as $10,” pointed out Viram Shah, founder of Vested Finance.
Stocks via Gift City
The National Stock Exchange (NSE) IFSC provides access to only the top 50 US stocks, and the structure differs from buying a full share. Investors receive a depository receipt that represents a fraction of the underlying stock. Each stock has a depository receipt ratio that determines the minimum investment. For example, if a stock trades at $210 and the DR ratio is 1:25, investors can buy one-twenty-fifth of the share for $8.40. Corporate actions are passed on in proportion to the fraction held.
On the BSE Gift City INX platform, fractional ownership is not available. India INX does not list US stocks on its exchange in the same manner as NSE IFSC does through depository receipts. Instead, India INX provides investors with access to US markets through its Global Access Program, which operates on a broker-tie-up model. Under this arrangement, India INX acts as an introducing broker.
Key Takeaways
- International investing serves as a hedge against the rupee’s historical annual depreciation of 2.5-3%.
- With domestic MFs hitting overseas limits, Gift City and direct foreign brokers are becoming the alternative entry points.
- Investments in Gift City don’t require reporting under ‘Schedule FA’.
- Direct US investing platforms allow ‘fractional shares,’ making high-priced stocks accessible to retail investors.
- Advisors recommend a 10-30% global allocation, built gradually to avoid buying into market peaks.
When an investor wants to buy a US stock or ETF through the platform, the order is routed to international broker partners who are licensed to execute trades on global exchanges. The shares are then held in custody through these foreign intermediaries, not as listed instruments on the India INX itself.
This structure is fundamentally different from NSE IFSC, where select US stocks are made available in the form of unsponsored depository receipts that trade directly on the IFSC exchange. India INX, by contrast, provides a gateway to global markets rather than running a separate listing framework for foreign equities.
Taxation
All foreign investments—except those made through Gift City—must be reported under Schedule FA (Foreign Assets) in the income-tax return.
“Gift City is considered Indian territory for tax purposes. Hence, the requirement doesn’t apply to resident Indians,” pointed out Harshal Bhuta, partner at P. R. Bhuta & Co. Chartered Accountants.
Outside of the distinct tax rules that apply to Gift City—domiciled retail funds, foreign investments are taxed using the standard framework: gains on assets held for less than two years are treated as short-term capital gains and taxed at the investor’s slab rate, while holdings beyond two years are taxed as long-term capital gains at 12.5%.
What should investors do?
International exposure is crucial for mitigating the impact of the rupee’s depreciation on your investments, but it should be built with a measured approach, according to financial advisors.
“While the global funds being launched in Gift City offer a useful avenue for diversification, analysing and selecting the right fund manager may be challenging for retail investors. Those who prefer a simpler route may instead consider broad-based ETFs or index funds listed on foreign exchanges, which are available on the platforms that allow foreign investments,” said Dhawan.
At the same time, it is important not to get carried away by the recent outperformance of international markets relative to domestic ones, he said. “An ideal exposure typically ranges between 10% and 30% of the portfolio, but as US markets have already rallied sharply, investors may choose to start with a lower exposure and build it gradually,” he added.
