International Fund
An international fund is a mutual fund scheme that invested all or a significant portion of its corpus in equity or other securities listed on foreign stock exchanges, allowing Indian investors to participate in global markets without directly opening overseas brokerage accounts.
International funds became increasingly accessible to Indian retail investors through the mutual fund route from the mid-2010s onwards, as AMCs launched feeder funds investing in popular global indices, geographic funds (US equity, Europe, China), and thematic global funds (global technology, global healthcare, ESG global). These funds typically operated as fund of funds, investing in a parent overseas fund or an overseas ETF, and were denominated in Indian rupees while their underlying assets were in foreign currencies.
The rationale for international fund allocation was diversification beyond Indian economic and corporate cycles. Indian equity markets, while delivering strong long-term returns, were subject to domestic-specific risks: monsoon dependence, fiscal deficits, rupee depreciation, election outcomes, and RBI policy actions. Global portfolios — particularly US equity — offered exposure to businesses whose revenues were global, in sectors such as semiconductors, cloud computing, biotechnology, and enterprise software that were underrepresented in Indian indices.
Currency played a pivotal dual role in international funds. When the Indian rupee depreciated against the US dollar or Euro, the rupee value of international fund holdings rose even if the underlying overseas NAV was unchanged. Conversely, rupee appreciation eroded returns from overseas holdings when translated back to rupees. Over multi-year periods, the structural depreciation of the rupee against major currencies (approximately 3–5 percent per year historically) provided a tailwind for unhedged international fund returns in rupee terms.
SEBI imposed a cumulative industry-wide cap on overseas investments by mutual funds. From February 2022, SEBI directed AMCs to pause fresh subscriptions in international funds after aggregate industry-level overseas investments approached the limit. This created temporary subscription restrictions in popular international funds, highlighting the regulatory constraint on their scalability compared to domestic funds.
Taxation was a critical consideration. International funds (other than those qualifying as equity-oriented by holding over 65 percent in Indian equity) were classified as non-equity funds post April 2023, with gains taxed at the investor's income tax slab rate irrespective of holding period. This eliminated the earlier advantage of the 20 percent with indexation rate for long-term capital gains, materially affecting the after-tax returns for investors in the 30 percent tax bracket.