After nearly 5 years of stagnation and decline, the overseas assets of mutual funds rose by 31% to ₹4,499 crore in FY 19 according to an RBI Survey released on 17th September. Much of this increase was a result of some foreign markets and currencies doing better than India, but these funds are beginning to see some investor interest. If we strip out the effect of rupee depreciation and look at US dollar assets, these rose from USD 528 million to USD 650 million in FY 19, a roughly 23% increase. However they still have some way to go before they attain the previous peak of USD 721 million reached in March 2014. Their total level is also a tiny fraction of the ₹23.7 lakh crore size of the Indian mutual fund industry indicating the huge scope for geographic diversification that lies ahead.
Indian mutual funds are collectively subject to a USD 5 billion limit by the RBI for overseas investments. On a per AMC level, this limit stands at USD 300 million. The present collective level of USD 650 million is well short of the USD 5 billion limit. Indian mutual funds invest abroad through fund of funds (FoFs) and through equity mutual funds which invest a certain portion of their holdings in foreign stocks. The latter variety of funds (such as PPFAS Long Term Equity Fund) typically place 65% gross assets in Indian stocks so that they are treated as domestic equity funds for tax purposes. However they put a significant chunk of the balance 35% in foreign stocks. Given the highly varied nature of international mutual funds, their collective performance is not adequately represented by the average. However the US focused funds among them have performed extremely well. As of 17th September, the best performing mutual fund scheme in India was the Motilal Oswal NASDAQ ETF, an exchange traded fund which tracks the NASDAQ Index in the US which delivered a CAGR of 17.5% over the past 5 years.
This performance is beginning to attract the interest of Asset Management Companies (AMCs). On 13th September, SBI Mutual Fund filed papers with the Securities and Exchange Board of India (SEBI) for SBI International Access US Equity Fund. Domestic brokerages are also waking up to the opportunity. On 25th September, HDFC Securities announced a partnership with a US brokerage DriveWealth LLC for giving customers a route to invest in US stocks. Investors opting for this route will have to open a broking account with HDFC Securities’ overseas partner and remit money via the Liberalised Remittance Scheme (LRS) of the RBI to the broking account. Direct stock investment, unlike investment through mutual funds, is capped at USD 250,000 per person per year by the RBI under the LRS.
Those looking to invest should take currency fluctuations into account. A depreciation in the rupee pushes up returns from international funds and vice versa.
“Investors should be prepared to deal with currency risk. Historically the Indian rupee has depreciated due to higher inflation in India than other countries. However with inflation in India coming down the average annual depreciation should fall from 5-6% to about 4%," said Amol
Joshi, founder Plan Rupee Investment Services. “Macroeconomic events do cause sharp moves to much bigger magnitudes but these eventually mean revert. The SIP route will protect you from currency fluctuations to some extent," he said.