International departures on hold

I've long held that of all the types of funds that are useful for investors, the ones that get ignored the most are international funds. However, the recent freeze in new investments in these funds made me think that perhaps this was changing. Even if actual investments become the raging trend that they should, the interest level among investors seems to be substantially higher than earlier. This may not be true for everybody, but the ones who know about international investing are certainly quite active.

As for the freeze on international investing, that was the result of the fact that there is an overall limit on the total amount that all international funds in India have invested outside the country. Currently, the limit is USD 7 billion and the total amount is quite close to it. As a result, in early February, AMFI, the trade body of mutual funds, asked all fund houses to put a freeze on fresh investments on all those funds which have a mandate to invest abroad. Now, there's news that the Reserve Bank and SEBI might extend the limit soon, perhaps by 25 per cent.

I must say that this limit has a very 1970s feel to it. I get it that in theory, India does not have a truly free flow of capital, but the millions of Indian mutual fund investors put together cannot invest more than 7 billion dollars outside India? Given the scale at which investment flows across India's borders now, that's a paltry amount. Moreover, this outflow is not an outflow. Of all the ways in which money flows out of the country, mutual fund investments are the most carefully accounted for, and one which is guaranteed to come back. Not just that, it will almost certainly come back with positive returns! Mutual fund investments are made to be eventually redeemed, and in almost all cases, are redeemed at a higher value than at which they were made. So this international investing is truly investing rather than just an outflow - it comes back with earnings.

All this is at the level of policy. At the level of an individual investor, international investing is a valuable diversification to one's mutual fund portfolio. Having some investments in such funds should be pretty much a routine choice of every equity investor. The advantage of international diversification, coupled with the cushion of the continuous exchange rate advantage that the rupee's depreciation offers, makes foreign funds a no-brainer.

Of course, like most categories of mutual funds, choosing the right kind can be a slight struggle. While there are a large number - about 65 - of international funds available from Indian fund companies, relatively few are diversified funds that invest in major businesses. More than half are relatively exotic funds that have some regional or industry theme. For the average Indian investor who just needs a certain amount of global diversification, such funds make little sense. It's far better to find a globally diversified fund or a US-based fund that invests in the major industries and businesses of the world. What's more, given the need for low cost and low research effort, US-based passive funds make the most sense. If you go to the 'Equity: International funds' section of Value Research Online, you'll find all international funds listed with complete data. Start by looking at the returns and the names of various types of funds that invest in the US, from broad indexes like the S&P500, as well as NASDAQ 100 and concepts like FANG+.

Regardless of what you choose, and the added workload of an entirely new kind of fund, investors should not ignore international funds. There was a time, more than a decade ago, when the Indian markets were always so much better than international ones that one could have argued against any international investing whatsoever. Those times are long gone. The RBI and the regulator should do their bit by relaxing the limit proactively, rather than these freezes which can just scare off investors.

Also read: It's recess time for international mutual funds