Best International ETFs for Tax-Efficient Growth in India

Quick Picks: Top International ETFs at a Glance

Here is a quick look at some of the best international fund options available to Indian investors. We will explore each one in more detail below.

How We Chose the Best Overseas ETFs in India

Picking the right global fund is more than just looking at past returns. We focused on a few key factors that matter most for long-term growth and tax efficiency.

Taxation Rules

This is the most important part. In India, most funds that invest in international stocks are structured as Fund of Funds (FoFs). The Indian tax laws treat these FoFs as non-equity or debt funds. This has a huge impact on your final returns. We will discuss this in detail later, but we chose funds where the potential growth could still be attractive despite the tax rules.

Expense Ratio

The expense ratio is the annual fee you pay to the fund house for managing your money. A lower ratio means more of your money stays invested and works for you. We looked for funds with competitive, low expense ratios.

Tracking Error

For index funds and ETFs, tracking error tells you how well the fund follows its benchmark index. A low tracking error means the fund is doing its job correctly. You want a fund that mirrors the index performance as closely as possible.

Diversification

The whole point of investing overseas is to diversify away from the Indian market. We looked for funds that give you access to different countries, especially the US, and different sectors like technology and consumer goods.

The Ranked List of Top International Funds for Indians

After considering the criteria, here is our ranked list of the best options for investing in overseas ETFs from India.

#1: Motilal Oswal S&P 500 Index Fund

This is our top pick for most investors looking to get started with international investing. It is technically an index fund, not an ETF, but it invests in a US-based S&P 500 ETF, giving you the same exposure.

• Why it's good: The S&P 500 is one of the world's most famous stock market indices. It gives you a piece of 500 of the largest and most stable companies in the United States, including Apple, Microsoft, and Amazon. It is a simple and effective way to bet on the long-term growth of the US economy. The expense ratio is also quite reasonable.
• Who it's for: This fund is perfect for beginners and long-term investors who want a solid, diversified foundation for their international portfolio. It is less risky than a tech-focused fund.

#2: Navi NASDAQ 100 Fund of Fund

If you have a higher risk appetite and believe in the power of technology, this fund is an excellent choice. It tracks the NASDAQ 100 index.

• Why it's good: The NASDAQ 100 is home to the 100 largest non-financial companies listed on the NASDAQ stock exchange. This means you get heavy exposure to innovative and growth-oriented companies like Google, Tesla, and Meta. Navi is known for its extremely low expense ratios, making it a very cost-effective option.
• Who it's for: This fund is ideal for investors who are comfortable with more volatility and want to capture the high growth potential of the US technology sector.

#3: Mirae Asset NYSE FANG+ ETF Fund of Fund

This is a highly concentrated and aggressive option for those who want to invest in the biggest names in tech.

• Why it's good: The FANG+ index includes just 10 mega-cap technology stocks. Think of names like Facebook (Meta), Apple, Amazon, Netflix, and Google (Alphabet). Because it is so focused, its performance can be explosive, both on the way up and on the way down.
• Who it's for: This is strictly for aggressive investors with a very high-risk tolerance. If you strongly believe these 10 companies will continue to dominate the world, this fund gives you a direct way to invest in that idea.

Understanding Taxation on International ETFs

This is where things get tricky. The tax rules for overseas ETFs India changed in April 2023, and it affects your returns. You must understand this before you invest.

As we mentioned, most international funds in India are Fund of Funds. This means they are taxed like debt mutual funds.

• Short-Term Capital Gains (STCG): If you sell your units before holding them for 36 months (3 years), the profit is added to your total income. You then pay tax according to your income tax slab rate.
• Long-Term Capital Gains (LTCG): If you sell your units after holding them for 36 months or more, the profit is taxed at a flat rate of 20%.

The big change is that the benefit of indexation has been removed for these funds. Indexation used to allow you to adjust your purchase price for inflation, which lowered your taxable profit. Without it, your tax bill on long-term gains will be higher than before.

Example of Tax Calculation:
Let's say you invest 100,000 rupees in an international fund.
After four years, you sell it for 150,000 rupees.
Your total profit (long-term capital gain) is 50,000 rupees.
Your tax will be 20% of 50,000 rupees, which is 10,000 rupees.
Your take-home profit is 40,000 rupees.

Are There More Tax-Efficient Alternatives?

While Indian Fund of Funds are the easiest way to invest globally, they are not the most tax-efficient. For high-net-worth individuals, another option is the Liberalised Remittance Scheme (LRS).

LRS allows you to send money abroad (up to a certain limit per year) and invest directly in US-listed stocks and ETFs. This route can be more complex and may involve higher transaction costs and paperwork. However, the taxation of capital gains from direct US stocks can sometimes be more favourable. This path is generally suitable for experienced investors with larger portfolios.

Frequently Asked Questions

Is investing in overseas ETFs a good idea?

Yes, it is a great way to diversify your portfolio. When the Indian market is not doing well, the US or other global markets might be. This geographical diversification reduces your overall risk.

What are the risks involved?

Besides the market risk of stocks going down, there are two other main risks. First is currency risk. If the US dollar weakens against the Indian rupee, it can reduce your returns. Second is the taxation risk, as the rules can change, affecting your final profit.

How much should I invest in international funds?

Financial advisors often suggest allocating between 10% and 20% of your total equity portfolio to international stocks. This provides good diversification without taking on too much currency risk.