Liberalised Remittance Scheme a way to invest in MFs abroad

Using this, a person can invest in shares, bonds or mutual funds abroad subject to the regulations in the destination country


I have a systematic investment plan (SIP) in an equity fund for five years ending next year. Is this same as a closed-end fund?

—Kartik S.

Closed-end funds, as their name suggests, are closed on both ends—the investment end and the redemption end. This means they have a fixed period during which they accept investments into the fund, and a fixed tenure (such as 3 or 5 years) after which they necessarily require the investor to redeem. No redemption is possible in the interim (during the stated investment tenure). Thus, during the period of investment, the fund neither accepts new investments nor allows redemptions.

If you have an SIP in an equity fund, it means you are investing a fixed amount into it every month. As you can see from the above description, this is not possible with a closed-end fund.

In your case, you are investing in a regular mutual fund scheme, also referred to as open-ended schemes. Such schemes allow investments and redemptions at any time. If your SIP in such a fund is ending next year, you can either stop it at that point in time, or you can extend it further. You can redeem the accumulated amount (with the returns) if you like, but there is no compulsion that you do so.

How does one invest in foreign mutual funds?

—Rounak Sethi

This question can be answered from three different perspectives: investing in a foreign market, investing in a fund managed abroad through a fund set up in India, and investing directly in a foreign mutual fund. To invest in a foreign market, say the stock market of the US, one can invest in a fund managed in India that deploys the inflows in the corresponding foreign market. ICICI Prudential US Bluechip Equity fund, for example, is one such fund. These funds are managed locally, but deploy assets globally.

The second category of funds are those that are managed overseas, but can be accessed directly through a fund in India. The Indian fund is often called a feeder fund in such cases, since it “feeds” assets to the overseas fund. It is typically managed in the same geographical area where the money is ultimately deployed. The Franklin India feeder–Franklin European Growth fund, for example, feeds all its inflows into the Franklin European Growth fund, which is managed overseas.

A third method of investing would be to directly invest in a fund managed abroad in that fund’s primary currency. The Indian central bank allows an Indian resident to invest up to $250,000 per year overseas under the Liberalised Remittance Scheme. Using this, a person can invest in shares, bonds or mutual funds abroad subject to the regulations in the destination country.

Among these three options, the first two are the easiest for an investor to adopt and would provide the adequate amount of diversification required for an investment portfolio.

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