 "Gift city")
Several fund houses have launched international offerings through GIFT City, providing Indian residents with a new pathway to invest abroad. At present, there are two funds from PPFAS Mutual Fund that track the S&P 500 and the Nasdaq 100 (have received approval), a global equity fund from DSP, and a fund that invests in US small caps from Baroda BNP Paribas. With domestic mutual funds constrained by regulatory ceilings on overseas exposure, investors may consider this alternative, especially once a wider menu of funds becomes available. Investors use the Liberalised Remittance Scheme (LRS) to invest, with the US$250,000 annual remittance limit per individual applying even to this route.
Under an Indian regulator
One key advantage of investing through GIFT City is that these funds operate under the regulatory oversight of an Indian regulator—the International Financial Services Centre Authority (IFSCA). “A unified regulator that combines the powers of all the four regulators enhances the ease of doing business,” says Jay Kothari, lead – investment strategist and head – international business, DSP Mutual Fund.
The domestic mutual fund industry remains bound by stringent limits on international exposure—a US$7 billion ceiling for mutual funds and a separate US$1 billion cap for overseas exchange traded funds (ETFs). These limits forced several US-focused feeder funds to halt fresh inflows and prevented asset management companies (AMCs) from launching new international products. “Investments into GIFT City funds do not fall under Sebi’s overseas investment limits applicable to domestic mutual funds,” says Arihant Bardia, chief investment officer and founder, Valtrust. Investors adopting this route will have access to global funds even when the domestic mutual fund route is blocked.
Another advantage of adopting the GIFT City route is that investors are not exposed to US estate tax.
Investors will also enjoy an experience similar to domestic mutual funds. These funds typically provide daily net asset value (NAV) disclosures, no lock-in, and fully digital onboarding. Wealth managers and distributors have integrated these products into their platforms. “Over time, the onboarding experience of investors will move close to that for domestic MFs,” says Nirmal Bari, principal officer, PPFAS Gift.
The GIFT City ecosystem is set to expand rapidly. A large pipeline of filings by AMCs suggests that investors will have access to a range of strategies over the next 6-12 months: passive, active, multi-asset, fixed-income, and commodity-linked.
Compared to direct LRS investing, the GIFT City route usually involves lower costs. When investing directly in overseas ETFs or stocks, investors typically incur foreign brokerage fees, custody charges, and currency-conversion costs. “Accessing global markets through a GIFT City fund can be more cost-effective than purchasing international ETFs, stocks or funds directly,” says Vaibhav Shah, head – products, business strategy and international business, Mirae Asset Investment Managers (India).
Easier tax compliance
Most GIFT City mutual funds operate as determinate trusts, which means the fund pays tax on capital gains and dividend income. Investors do not pay capital gains tax at redemption, and there is no tax deduction at source on withdrawals. “Long-term gains—on holdings of twenty-four months or more—will be taxed at 14.95 per cent. Short-term capital gains arising from holdings of less than twenty-four months are taxed at 42.74 per cent,” says Niteen Dongare, director and chief executive officer, Anand Rathi International Ventures IFSC. Dividends are taxed at 35.88 per cent within the fund and are not taxed again in the hands of investors. These funds do not require disclosure under Schedule FA (foreign assets) while filing income tax return. Any tax collected at source (TCS) paid during remittance can be adjusted while filing returns.
High minimum investment
Most schemes require a minimum investment of around US$5,000 (approximately ₹4.5 lakh). “Investors must ensure that committing such an amount fits into their overall asset allocation,” says Viram Shah, founder and chief executive officer, Vested Finance.
GIFT City funds involve two levels of expenses: the fee charged by the feeder fund and the cost of the underlying fund or ETF.
Returns will depend on global market performance, fund performance, and on US dollar–Indian rupee movements. Investors must be comfortable with international equity volatility, as well as the impact of currency fluctuations on portfolio returns. They must also bear in mind that units redeemed within twenty-four months attract a high level of tax.
Key checks to run
Prospective investors should first ensure that they have sufficient room within the Reserve Bank of India’s (RBI’s) LRS limit of US$250,000 annually. “They should assess whether the exposure they get through an overseas fund or index matches their long-term diversification need and risk appetite,” says Siddharth Jain, vice president – valuations, SPA Capital Advisors.
Investors must also review the total ownership cost, including both feeder-fund and underlying-fund expense ratios. They should understand cut-off timings and redemption cycles. They should also monitor whether the fund consistently stays true to its stated investment mandate.
Points to remember
Investors must avoid exceeding the $250,000 limit, which applies to all LRS remittances. They should avoid excessive concentration in a single market or sector. GIFT City funds should not be treated as short-term vehicles, given the high tax rate on investments of less than 24 months and possible exit loads. Finally, the impact of forex conversion charges and banking fees should be factored into investment decisions.
Be mindful of costs
- Passive or feeder-style funds have lower total return expense ratios of 0.30–0.80 per cent
- Active global equity funds charge 1–2.5 per cent
- Bank charges when remitting funds under LRS include forex spread of 0.5–2 per cent
- Additional fees such as SWIFT charges and trade commission may apply
- Some banks levy a flat ₹500–₹1,000 remittance fee
- TCS of 20 per cent applies when annual LRS remittances exceed ₹10 lakh
The writer is a Mumbai-based independent journalist
