Over the last five to seven years, investing in the capital market has gained rapid traction. Many more Indians are buying stocks or investing in mutual funds in a big way. Unfortunately, much of that investment remains within India and companies in India. In a way, many investors are putting their eggs in one basket. While India is a high-growth market, exposure to just one market is a risk and wealth managers often stress on the need to diversify investments.
Another important thing is that by investing just in India, many are missing out on large and emerging global themes, like semiconductors or artificial intelligence or biotech.
The easiest way to diversify investments into global markets is via mutual funds that have schemes targeting those markets. For instance, funds targeting the US S&P500 or tech heavy Nasdaq or schemes focused on geographies like Europe or China.
However, the Reserve Bank of India has a cap of $7 billion on the total investments that Indian mutual funds can make in foreign markets. With most fund houses having hit the limit, this door to international investing is almost closed until the RBI raises the cap.
Retail investors could also invest directly and buy shares in the US. But, it is not as simple a process and costs can be high.
Asset management companies have now found an alternate route, which perhaps is also an advantage for Indian investors looking to invest abroad. Enter outbound funds from the GIFT (Gujarat International Finance Tec-City) International Financial Services Centre.
DSP Mutual Fund has announced its new offering—the DSP Global Equity Fund—targeting retail investors from India. This fund will invest in global stocks, typically a portfolio of 30-50 companies, seeking long-term capital appreciation. The US, Europe, Hong Kong, Taiwan, South Korea, Japan and Canada are the major geographies the fund will invest in.
This fund is targeted at resident Indians, primarily retail investors, who can initially invest $5,000 (about Rs4.3 lakh), with additional investment being $500 each.
The biggest difference or advantage in investing in such an outbound fund through GIFT City is that, unlike mutual funds where the investment limit is subject to availability of industry-wide and asset management company-level limits, here the investment limit depends on the liberal remittance scheme (LRS) limit, which is $250,000 for resident individuals per financial year.
“The investor is able to diversify globally in his portfolio,” said Kalpen Parekh, MD and CEO of DSP Mutual Fund. “The investor is able to build forex currency. Say tomorrow you want to send your kids for a four-year degree programme overseas. It is a reasonably large expense. So you want to save for that. Products like this allow you to take care of that.”
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Typically, India accounts for only around 4-5 per cent of global market cap. In a way, by investing only in India, an investor is missing out on 95 per cent of opportunities. “India is a high-growth market, but it’s still just one part of the global opportunity set,” said Amit Bivalkar, founder-director at Sapient Finserv. “Investing abroad gives you access to unique sectors and companies you can’t buy locally and geographic diversification reduces your dependence on the Indian economy.”
Many, especially high-net worth individuals, invest abroad via LRS to accumulate funds in strong currencies like the US dollar or euro, which can then be used for a child’s foreign education or for travelling abroad.
A key point to consider is also the fact the rupee has been depreciating against the dollar over time. So, investing via LRS in such outbound funds helps them lock in future dollar needs at current exchange rate, while also gaining over time from potential dollar appreciation.
DSP is not the only asset manager tapping into this opportunity to launch outbound international funds through the GIFT City route.
Mirae Asset Investment Managers (India) recently launched a global allocation fund, which will invest in a diversified portfolio of global equity exchange traded funds (ETFs) based on broad market indices and emerging themes. This, though, is a non-retail fund available to accredited investors or those committing a minimum subscription of above $151,000 (about Rs1.26 crore) with a cap of 1,000 investors.
However, Mirae also has plans to launch a retail-focused international outbound fund from GIFT City this year.
According to Vaibhav Shah, head of products, business strategy and international business at Mirae, they have already received investment commitments of around $7-8 million and is planning the first close soon.
Mirae is already a large global asset manager, managing close to $270 billion, and has about 7,750 offshore funds. Shah says this can be a big leverage and the fund it has launched through GIFT will have the flexibility to invest in multiple underlying themes and funds.
Several other asset management companies are also planning to launch outbound international funds via GIFT City. In June, Tata Asset Management had received International Financial Services Centres Authority approval to commence operations in GIFT City.
You could directly buy global stocks or ETFs through several platforms via LRS, but you would have to pay high custody fees, apart from broking charges and currency conversion fee. Then there is the tax element. “All this can be managed by a fund structure in a more efficient manner at a lower cost with a professional fund manager managing it,” explained Shah.
Bivalkar of Sapient says tax efficiency is one advantage these funds have. “Capital gains and dividend taxes are paid at the fund level in the respective foreign jurisdictions using the fund’s PAN,” he said. “For the investor, there’s no additional tax liability in India at redemption, no TDS and no extra filings for these gains.” According to him, international investing works best long term.
Let us consider the DSP fund. If the holding period is over two years, then long-term capital gains will be calculated at 14.95 per cent. But, if your holding is under two years, then the short-term capital gains tax will be significantly higher at 42.74 per cent.
While international investing has its advantages, one must remember there are market risks. Also, you will have currency movements, political changes and regulatory shifts in the jurisdictions where the underlying investments are made. An investor will have to take these things into consideration before investing.