Why Are Overseas ETFs Performing Better Than Indian Funds?

Most Indian Investors Get Overseas ETFs Wrong

You have heard that overseas ETFs in India are beating many domestic mutual funds. You checked the numbers. And now you feel frustrated. Your Indian equity fund gave you 12 percent returns last year. Meanwhile, a simple US-based ETF delivered 25 percent. What went wrong?

Nothing went wrong with your fund manager. The gap comes from something bigger. Geography, currency, and sector exposure all played a role. Once you understand these three forces, the picture gets clear fast.

Why Overseas ETFs Have Pulled Ahead Recently

The last few years created a perfect storm for international ETFs. The US dollar strengthened against most currencies. Tech stocks — which dominate US indices — had a massive rally. And Indian mid-cap and small-cap funds hit rough patches.

Here is what drove the outperformance:

• Currency tailwind — When the rupee weakens against the dollar, your overseas ETF gains extra returns just from the exchange rate movement. A 5 percent rupee depreciation adds 5 percent to your dollar-denominated returns.
• Tech concentration — The S&P 500 has over 30 percent weight in technology. Indian indices have far less. When tech booms, US ETFs fly.
• Valuation gap — Indian markets traded at premium valuations for much of 2024-2025. US large caps, despite high absolute valuations, kept getting earnings upgrades.
• Sector diversity — Overseas ETFs give you access to sectors India lacks. Think semiconductors, cloud computing, electric vehicle supply chains, and biotech.

The Real Diagnosis: Your Portfolio Had a Geography Problem

Most Indian investors put 100 percent of their money in Indian stocks. This feels safe. You know the companies. You read the news. But this is a concentration risk you are ignoring.

India makes up about 3-4 percent of global market capitalization. By investing only in India, you are betting everything on one country. That is like putting all your money in one stock because you work there.

When your single-country bet underperforms the rest of the world, you feel the pain. That is exactly what happened. Indian large-cap funds returned around 10-14 percent annually in recent years. Global diversified portfolios returned 15-20 percent.

Overseas ETFs in India: What Options Do You Have?

Indian investors can access international markets through several routes. Each has trade-offs you should know.

• Fund of Funds (FoF) — Indian mutual funds that invest in overseas ETFs. Easy to buy. But you pay double fees — the Indian fund's expense ratio plus the underlying ETF's fee.
• Direct overseas ETF purchase — You open an international brokerage account and buy ETFs directly. Lower fees. But you handle tax reporting yourself.
• Indian-listed international ETFs — Some ETFs listed on NSE track global indices. Limited selection. Liquidity can be thin.
• LRS route — The Liberalised Remittance Scheme lets you send up to 250000 dollars per year abroad. You can invest this in any global ETF.

Each route works. The best choice depends on how much you plan to invest and how comfortable you are with paperwork.

But Wait — Will Overseas ETFs Always Beat Indian Funds?

No. Absolutely not. And this is where most people make a mistake.

They see recent returns and chase them. Performance cycles exist. From 2003 to 2007, Indian markets crushed every global index. The Sensex went from 3000 to 20000. No US ETF came close.

From 2020 to 2025, US tech dominated. But tech cycles end. The dot-com bust proved that. Mean reversion is real.

The smart approach is not to pick winners. The smart approach is to own both. A 70-30 split — 70 percent India, 30 percent international — gives you the best of both worlds. You participate in India's growth story. You also catch global winners.

How to Fix Your Portfolio Right Now

If your portfolio is 100 percent Indian, here is a simple fix:

• Step 1 — Calculate your total equity allocation. Include mutual funds, stocks, and ETFs.
• Step 2 — Decide on your international target. Start with 20-30 percent if you are new to this.
• Step 3 — Pick one broad-market international ETF. A total world index fund or an S&P 500 tracker works well.
• Step 4 — Start a monthly SIP into the international fund. Do not try to time currency movements.
• Step 5 — Rebalance once a year. If international grows to 40 percent, trim it back to 30.

This is not complicated. You do not need to become a currency expert or track US earnings calls. One fund, one SIP, one annual rebalance.

Tax Implications You Must Know

Overseas investments get taxed differently in India. Gains from international mutual funds and ETFs are taxed at your income tax slab rate if held for less than two years. For holdings beyond two years, you get long-term capital gains treatment with indexation benefits.

The tax rules changed in 2023 and again in 2025. Always check the latest rules on the Income Tax Department website before making decisions.

Also remember: dividends from overseas ETFs are taxed as regular income. There is no special dividend tax rate for foreign investments.

The Bigger Picture

Overseas ETFs performed better than many Indian funds recently. That is a fact. But the lesson is not to dump Indian investments and go all-in on US stocks. The lesson is simpler.

Diversify across geographies. The world economy is interconnected. Your portfolio should reflect that. Indian growth remains strong. But limiting yourself to one country's market is a risk you do not need to take.

Start small. Add one international ETF. Let compounding do its work across borders. Your future self will thank you for thinking globally today.