Financial distributors turn to GIFT City for outbound funds. But few can enter.

With the traditional route of accessing international markets via domestic mutual funds largely shut due to regulatory caps, distributors—specifically, mutual fund distributors and independent financial advisers—are eyeing GIFT City-based outbound funds as a viable alternative.

This bottleneck with the mutual fund route, however, has led to inflated premiums on older global exchange traded fund offerings, leaving investors with few options for diversification.

GIFT City, with its status as an international finance hub and relaxed regulatory environment, is emerging as a workaround, which could potentially open a new route for Indian investors seeking to diversify their portfolios with global exposure.

“There is definitely an appetite from people wanting to invest globally,” said Vaibhav Shah, head of products, business strategy and international business, at Mirae Asset Investment Managers (India). “When we say we have an outbound fund, there is interest from distributors to sell the product, and from the investors to buy it.”

Mirae Asset Global Allocation Fund IFSC, which opened for subscription in April, invests in exchange traded funds tracking global indices in sectors such as artificial intelligence and semiconductors.

Jay Kothari, senior vice-president and global head of international business at DSP Mutual Fund, said several clients already invest directly in outbound funds and distributors don’t want to miss out on tapping into the growing demand for global equity investing.

DSP Asset Managers opened India’s first retail-focused offshore mutual fund at GIFT City in June. The Global Equity Fund allows Indian residents to invest as little as $5,000 (about ₹4.3 lakh) in a diversified basket of global stocks without relying on offshore brokerages, feeder funds, or cumbersome tax filings.

A cumbersome alternative

Indian investors had the option of investing in global equities through mutual funds. RBI, however, has a $7 billion limit on the total overseas investments of mutual funds, with a sub-limit of $1 billion ceiling specifically for foreign exchange traded funds. (Such ETFs own a collection of global stocks and trade on a stock exchange.)

RBI’s limits were breached around 3 years ago, effectively halting fresh mutual fund investments in global equities. Investments into fund-of-funds, too, have stopped. However, one can invest in ETFs, but since there are only six ETFs in India tracking global indices, this comes at a premium.

Turning to GIFT City funds for investing in overseas equities requires routing money through the liberalised remittance scheme. RBI allows individuals to send up to $250,000 overseas via the LRS route, including for investing, without having to take its approval.

According to Pramod Gubbi, co-founder at Marcellus Investment Managers, large distributors already have been taking the LRS route to invest in global market funds via jurisdictions like Singapore.

“Now, smaller IFAs and MFDs (independent financial advisers and mutual fund distributors) are also exploring this space since global diversification is essential for all investors. Earlier, smaller players accessed global exposure through mutual funds, but with the overseas limit now capped, they are turning to GIFT City,” Gubbi said.

This, however, poses certain challenges.

“Investors remitting funds via LRS face a 20% tax collected at source, which, although claimable as advance tax, can act as a psychological burden for many,” said Shah of Mirae Asset Investment Managers.

Gubbi added that the LRS process is still somewhat cumbersome as not many banks offer fully digital options.

Not a proven model

Investors have the option of tapping GIFT City alternative investment funds (AIFs) to buy global stocks. But the minimum ticket size to invest in these AIFs is $150,000 (about ₹1.3 crore), making it prohibitive for most retail investors.

There is no minimum investment size specified for GIFT City retail outbound funds, but currently there is only one such investment vehicle—DSP Asset Managers’s Global Equity Fund.

As of 31 March, GIFT City had 135 category III AIFs, as per the International Financial Services Centres Authority’s quarterly bulletin. IFSCA, based in GIFT City, is India’s unified regulator for international financial services.

Kartik Sankaran, founder of Fiscal Fitness, a registered distributor, noted the growing interest in GIFT City outbound funds, but said if the mutual fund route opens up again, investors could return to a route that’s already tried and tested.

“Most GIFT City funds are feeder structures that invest into other offshore funds, raising concerns about a fund manager’s direct capability in researching and managing global equities,” Sankaran said.