International funds offered by domestic mutual fund companies have rewarded the Indian investors handsomely over the last few years. For instance, schemes that focused on the US markets delivered five-year returns at a compound annualised growth rate between 15 per cent and 28 per cent.

Though investing in international markets through mutual funds has proved to be a good portfolio diversifier over the long-term, regulatory norms restrict this path.

Regulatory restriction

In February 2022, SEBI asked domestic mutual fund companies to stop further investments in foreign stocks. It was to prevent a breach of the Reserve Bank of India’s industry-wide limit of $7 billion on investments in overseas securities and funds. The RBI also capped the limit for individual fund houses at $1 billion and for investing in overseas exchange-traded funds (ETFs) at $1 billion.

Later, the capital market regulator allowed mutual funds to invest in foreign stocks as long as their fund deployment adhered to the RBI ceilings.

Since then, a number of fund houses have occasionally allowed subscriptions. Currently, 28 of the 74 international schemes are accepting fresh subscriptions. Of these, six are ETFs that are available for buying and selling in the secondary markets. The others accept both fresh lump-sum and SIP. They also allow switch-out or instalments of Systematic Transfer Plans (STP) transactions.

The accompanying table has a list of international schemes that are open for fresh subscriptions as of December 20. Keep in mind that the fund houses reserve the right to suspend subscriptions when they are close to the headroom limit.

A diversifier

For investors who wish to expand their portfolio’s exposure to other countries, the US markets might serve as a starting point.

Currently, there are 20 US-focused schemes (excluding three fund of funds or FoFs that invest within the inhouse international ETFs). Of these, seven track the performance of the Nasdaq 100 index. Other schemes cover the various segments of the US equity markets.

The US market provides better diversification to Indian investors, as the domestic market has one of the lowest correlations with the S&P 500. Secondly, the US provides exposure to broader megatrends (AI, biotech, cloud, aerospace) that are still largely under-represented in India. It also helps manage currency fluctuations that can impact investments.

Indian investors can also participate in the US market through the Liberalised Remittance Scheme (LRS), in addition to mutual funds. Opening an overseas trading account with a foreign broker having a presence in India or with a local broker who has a partnership with an American broking firm is one approach to invest in the US market while benefiting from the LRS.

Domestic mutual funds also offer international schemes focusing on other regions including China, Europe, emerging and developed markets.

With many domestic-equity focused schemes too allocating funds to foreign equities, the mutual fund industry’s overseas assets across international FoFs, direct equities and international ETFs were valued at over ₹77,639 crore as of November 30.

Allocation to the overseas markets can be anything from 10 per cent to 20 per cent of your long-term portfolio. However, you should have asset allocation in place based on your financial goals and risk profile.

Overseas ETFs are trading  at premium

There are currently six ETFs that follow the indices of overseas markets. Of these, two are China-focused ETFs that track the Hang Seng index and Hang Seng TECH index, while the other four track the US indices: NYSE FANG+, S&P 500 Top 50, Nasdaq 100 and NASDAQ Q 50 index.

They are listed and traded in both the NSE and BSE. Data compiled from the NSEIndia show that all these ETFs have been trading  at huge premium to their Net-Asset Value (NAV), recently. For instance, the closing price of Mirae Asset NYSE FANG+ ETF as of December 18 on the NSE was ₹139.2, which was about 26.6 per cent higher than its NAV of ₹109.9.

Since there are limited international schemes open for subscription, many investors prefer opting for the ETF route to buy units of the overseas ETFs. They should be mindful that accumulating units at huge premium would lead to return erosion when the NAV and spot price converge.

For instance, you would have made no returns although the NAV went up 29% in the period between 19-Apr-2024 and 21-Oct-2024, if you had purchased a NYSE FANG+ ETF unit on April 19 at a price that was traded significantly higher on the NSE.

An ETF’s spot price generally closely follows the NAV of its underlying portfolio. The premium of spot price to NAV are temporary phenomena that occur due to bullish outlook, limited supply and absence of market makers.

These overseas ETFs may have been trading at huge premium due to renewed interest among investors and absence of market makers.

Market makers help keep the ETF price in line with its NAV. They step in whenever there is a mismatch in the spot price of ETF and the iNAV. There is no active participation from the market makers due to the current regulatory restriction.  

iNAV is an indicative NAV which is a real-time estimate of an ETF’s NAV. The iNAV of equity ETFs are disclosed at a maximum lag of 15 seconds, and for debt, a minimum of four times a day. You can get these numbers from the respective fund house’s website.

Investors should always compare the iNAV with the spot price before buying the units of ETFs. Considering the current scenario, investors should stay away from buying the units of these overseas ETFs from the secondary market for the time being. Opportunities may present themselves when the iNAV and price converge.

Published on December 21, 2024