Investor Corner/The asset classes/Mutual Fund Categories
2.4.6 International / Overseas Funds
International or overseas funds invest in foreign markets, giving Indian investors exposure beyond domestic equity and debt. They add currency risk and geopolitical risk in exchange for genuine global diversification.
Why global exposure has real value
The Indian market, while significant, represents only a portion of total global market capitalisation, and it is naturally concentrated in the sectors and companies that dominate the domestic economy. International funds give access to companies, industries and regions, such as large global technology firms, that may be underrepresented or entirely absent from a purely domestic portfolio.
International or overseas funds invest in equity markets outside India. Most Indian international funds are Fund of Funds (FoFs) that invest in an underlying foreign fund, though a few directly invest in international stocks. The most popular categories target the US market (S&P 500, Nasdaq 100), global developed markets, or emerging markets. Some focus on specific themes (global technology, global healthcare) or regions (China, Europe, ASEAN).
The core rationale for international diversification is that the Indian equity market, despite its size and depth, represents only about 3-4% of global equity market capitalisation. By investing entirely in India, you are making a concentrated bet on one country's economy, currency and regulatory environment. International exposure reduces this concentration and provides access to sectors (global technology, luxury goods, advanced pharmaceuticals) that are underrepresented or absent in the Indian market.
The additional risks that come with it
Returns from an international fund are affected not just by how the foreign market itself performs, but also by how the rupee moves against the foreign currency over the same period. A foreign market that rises 10% in its own currency could show quite a different return once converted back to rupees, depending on the currency's movement over that same period. Geopolitical and regulatory risk specific to that foreign market adds a further, separate layer of uncertainty.
International investing introduces currency risk. If you invest in a US fund and the US dollar weakens against the rupee, your returns in rupee terms will be lower than the fund's dollar returns. Conversely, if the dollar strengthens (as it has tended to do during global risk-off episodes), currency adds to your returns. Over long periods, the Indian rupee has depreciated against the US dollar by roughly 3-4% per year on average, which has historically added to the rupee returns of dollar-denominated investments. However, this trend is not guaranteed to continue at the same rate.
Regulatory constraints in India have affected international fund availability. The RBI imposes an aggregate industry-wide cap on overseas investments by mutual funds. When this cap is approached or breached, AMCs are forced to stop accepting fresh investments in international funds. This has happened multiple times in recent years, temporarily closing popular international funds to new inflows. While this cap has been revised upward, it remains a structural constraint that does not apply to domestic funds.
A sensible allocation, not an all-or-nothing choice
Most planners suggest a modest allocation to international funds as a diversifier, rather than either ignoring global markets entirely or shifting a large portion of a portfolio abroad. A small, deliberate allocation captures most of the diversification benefit while keeping currency and geopolitical risk appropriately sized.
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A common guideline is to allocate 10-20% of equity exposure to international markets. This is enough to provide meaningful diversification benefit without making the portfolio overly dependent on foreign currency movements and overseas market behaviour. For most Indian investors, a simple US market index fund (S&P 500 or total US market) provides adequate international exposure as a starting point. More granular international allocations (adding Europe, emerging markets, specific sectors) can be considered once the core domestic and US allocations are in place.