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Exploring Global Markets: Mutual Funds and ETFs in India vs. LRS

sreyakalidindi

In an era where global markets are more accessible than ever, the allure of international investing has captured the imagination of Indian investors. From owning a slice of the world’s largest companies to diversifying portfolios beyond domestic boundaries, the possibilities are endless. But how do you step into the world of global investments?


Should you opt for the simplicity of mutual funds and ETFs offered by Indian AMCs, or take the direct route with the Liberalised Remittance Scheme (LRS) to explore the vast universe of international stocks and funds? Understanding the pros and cons of these options can be the key to unlocking your financial growth on a global stage. Let’s break it down by different parameters and see which path suits your investment goals better!


Diversification


Global mutual funds and ETFs provide diversification by offering exposure to international indices and markets, which can act as a hedge against domestic market volatility. However, the diversification is limited to the fund manager’s selected portfolio. LRS, on the other hand, offers unparalleled diversification as investors can directly choose their global investment instruments, enabling exposure to niche sectors, high-growth stocks, and emerging markets that are not available through Indian AMCs.


Limitations


Indian investors can invest in international ETFs and FoFs only if the mutual fund house offering these funds stays within the SEBI-imposed limits:

  • $7 billion total industry cap for overseas investments.

  • $1 billion per mutual fund (AMC) cap.


In contrast, LRS allows investors to directly access international markets, enabling investments in a wide range of stocks, ETFs, and funds. However, LRS investments are also subject to a cap of

  • $250,000 per individual per financial year


This cap is designed to regulate foreign exchange outflows, ensuring India’s forex reserves and currency stability are protected while preventing misuse like money laundering or tax evasion.


Regulations


Investments in global mutual funds and ETFs are regulated by SEBI, ensuring investor protection and ease of compliance. Investors do not need to manage foreign accounts or adhere to FEMA guidelines, making it a simpler process. In contrast, LRS investments are governed by RBI under FEMA regulations, requiring investors to open foreign accounts, handle forex transactions, and comply with remittance documentation. Disclosure of all foreign assets held outside of India is required while filing for ITR.


Tax Implications


ETFs

MFs/FoFs

LRS

Short-Term Capital Gains

Taxed as per income tax slab rate (held ≤ 1 year)

Taxed as per income tax slab rate (held ≤ 2 year)

Taxed as per your income tax slab rate (held ≤ 2 years)

Long-Term Capital Gains

Taxed at 12.5% annually (held > 1 year)

Taxed at 12.5% annually (held > 2 year)

Taxed at 12.5% annually (held > 2 years)

Dividends

Taxed as per income tax slab rate

Taxed as per income tax slab rate

Withholding tax of 25% on gross dividends at source is charged in the US. 


It can be claimed subject to submission of Form 67

TCS

Not Applicable

Not Applicable

20% TCS applies on remittances exceeding ₹7,00,000.


TCS can be claimed as a refund while filing your Income Tax Return (ITR).


Currency Depreciation


Currency depreciation plays a significant role in international investments. Global mutual funds and ETFs provide indirect exposure to currency fluctuations as the underlying assets are denominated in foreign currencies, but the investments themselves are INR-based. In contrast, LRS investments offer direct exposure to foreign currencies, which can amplify returns in case of INR depreciation but also expose investors to higher forex risks if the rupee appreciates.


Growth Potential


The growth potential of global mutual funds and ETFs is moderate, as the investments are managed and curated by AMCs, often tied to broader international indices. LRS investments, however, have higher growth potential, as they allow investors to directly access global markets, including high-growth sectors, emerging industries, and individual stocks. This flexibility provides opportunities to maximize returns by targeting specific investment opportunities that are not available through mutual funds or ETFs.


Conclusion


The world of global investing is closer than ever, offering Indian investors exciting opportunities to diversify, grow, and secure their financial future. Whether you choose the simplicity of mutual funds and ETFs or the boundless possibilities of the Liberalised Remittance Scheme, the decision comes down to your appetite for risk, complexity, and control. One path offers ease and regulation; the other unlocks direct access to global markets and growth potential. The choice is yours—are you ready to explore new horizons and make the most of what the global financial landscape has to offer? Your next big investment could be just a decision away!

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