Understand the Tax Implications
The taxation of international funds is a critical first check. Unlike domestic equity funds, gains from offshore funds are taxed differently in India. If you hold an international fund for more than 24 months, the gains are considered long-term capital
gains (LTCG) and are taxed at a rate of 12.5% without the benefit of indexation. For a holding period of 24 months or less, short-term capital gains (STCG) are added to your total income and taxed according to your applicable income tax slab. This tax treatment can significantly impact your net returns, especially for those in the higher tax brackets, so it's essential to factor this into your investment strategy and holding period.
Know the LRS and TCS Rules
Any money you send abroad for investment falls under the Reserve Bank of India's (RBI) Liberalised Remittance Scheme (LRS). This scheme allows every resident Indian to remit up to USD 250,000 per financial year for permissible transactions, including investments. It's crucial to track all your foreign remittances—for travel, education, or investments—as this is an aggregate limit per individual, tracked by your PAN. Furthermore, be aware of the Tax Collected at Source (TCS). For investments, a 20% TCS is applicable on remittances exceeding a threshold of ₹10 lakh in a financial year. While this TCS is not an additional tax and can be claimed as a credit when you file your income tax returns, it does mean a significant amount of your capital is blocked upfront, impacting your cash flow.
Evaluate the Currency Risk
When you invest in an offshore fund, your returns are influenced by two factors: the performance of the fund's underlying assets and the fluctuation of the Indian Rupee (INR) against the fund's base currency (like the USD). This is known as currency risk. If the rupee depreciates against the dollar, it can boost your returns when you convert them back. Conversely, if the rupee strengthens, it can erode your gains. Some funds may use currency hedging strategies to mitigate this risk, but this often comes at a cost that can affect the fund's performance. You must decide if you are comfortable with this added layer of volatility or if you should look for funds that actively manage currency exposure.
Scrutinise the Expense Ratio
Offshore mutual funds, particularly those structured as a 'Fund of Funds' (FoF), can have higher costs. An FoF in India collects money from local investors and invests it in a parent fund overseas. This structure can sometimes lead to a double expense ratio: one charged by the Indian fund manager and another by the manager of the underlying international fund. These costs are deducted from your investment's value annually and can significantly reduce your long-term returns. Always compare the total expense ratio (TER) of the offshore fund with its domestic counterparts and peer international funds to ensure you are not overpaying for global exposure.
Assess the Underlying Fund and Manager
Don't just invest based on a fund's name or theme. Dig deeper into what you are actually buying. Research the underlying international fund, its investment strategy, the track record of its fund manager, and the companies in its portfolio. Are you investing in a broad, diversified index like the S&P 500, or a niche, thematic fund focused on a specific sector like AI or clean energy? Understand the geopolitical and economic risks of the countries the fund invests in. A fund focused on a single emerging market carries different risks than one spread across developed global economies. Ensure the fund’s strategy aligns with your own risk appetite and investment goals.
