International Diversification for Indian Investors
International diversification allows Indian investors to gain exposure to global equities — US, European, and emerging market companies — primarily through the RBI's Liberalised Remittance Scheme (LRS) of USD 250,000 per year, or through domestic international mutual funds.
Indian equity markets, while large and liquid, represent approximately 3-4% of global market capitalisation. Concentrating an entire portfolio in Indian equity exposes investors to a single economy's business cycle, currency, and regulatory environment. International diversification mitigates this concentration by adding uncorrelated or differently-correlated return streams.
The Liberalised Remittance Scheme (LRS) allows resident Indians to remit up to USD 250,000 per financial year for permissible capital account and current account transactions. Investments abroad — in foreign stocks, ETFs, bonds, and real estate — qualify under LRS. Platforms like Vested Finance, INDmoney, and Stockal have simplified direct US stock investing from India by opening brokerage accounts with US partner brokers.
Alternatively, Indian mutual funds offer international fund of funds (FoFs) — schemes that invest in overseas ETFs or actively managed funds. Popular options include funds tracking the S&P 500, NASDAQ 100, or global multi-asset indices. After the Finance Act 2023, international FoFs lost their debt mutual fund classification advantage and are now taxed at slab rates on gains, regardless of holding period. This significantly altered the tax profile and reduced the appeal of these funds for long-term investors.
Direct overseas investments under LRS are taxed in India: short-term capital gains (held less than 24 months) are taxed at slab rate; long-term gains (held over 24 months) are taxed at 20% with indexation benefit. Foreign dividends are taxed at slab rates as income from other sources. Double Taxation Avoidance Agreements (DTAAs) help avoid double taxation, with the tax paid abroad available as a Foreign Tax Credit (FTC) in India.
Rupee depreciation against the USD adds to returns when converted back — over 20 years, the rupee has depreciated approximately 3-4% per year against the dollar, augmenting US equity returns. A USD 1,000 investment that grows at 10% in USD terms and the USD appreciates 3% against INR delivers an effective INR return of approximately 13%.
Practical considerations include: TCS of 20% on LRS remittances above ₹7 lakh per year (reclaimable against tax liability), Form 67 filing for FTC, and FEMA compliance. International diversification is best implemented gradually over multiple years rather than as a large lump sum.