Indian investors can diversify their domestic portfolio with international funds, managing risks and gaining from currency depreciation, with some having 100% exposure to foreign equities. Budget 2024 brings about further taxation changes for the International Fund of Funds. Girish Lathkar, Partner and CoFounder, Upwisery Private Wealth shares the nitty-gritty of Budget 2024 new rules related to the taxation of international funds and Fund of Funds.
What has been the impact of Budget 2024 on international Fund Of Funds?
In the case of international fund of funds, the budget has revised the applicable taxes and holding periods for STCG and LTCG. As per the revised norms, STCG is now 24 months and taxes applicable at slab rates. For LTCG, when the holding period is more than 24 months, the rate of tax will be 12.5%.
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International fund of funds are likely to find favour with the investors as this brings simplicity and uniformity to this investment category which was otherwise categorised as debt funds earlier and taxed as per slab rates.
In the case of overseas ETF’s the LTCG holding period and tax rate is similar to equity i.e. 12.5% above 12 months and STCG is taxed at slab rates.
The revised LTCG tax is also applicable on Fund Of Funds, thus offering good opportunities for overseas investments, but do you think the overseas investment limit laid down by RBI on MFs will act as a barrier?
Currently, the RBI LRS limits for MFs investing abroad in Overseas FoF routes is USD 7 billion and USD 1 billion for overseas ETFs. Though there are limited FoF schemes, this route allows investors to invest abroad, without utilizing the LRS limits which they might want to use for education, medical or any other purposes as specified by RBI.
The FoF route is simple, easy and involves no TCS/LRS etc, but RBI limits can act as a barrier for investors wanting to invest abroad through this route as it is prone to closure for a further subscription if the limits are reached and investors may not be able to buy when they have liquidity.
There is increasing demand for more innovative products and different asset classes, such as commercial real estate, private credit and private fixed income, private equity, venture capital and so forth, while at the same also a tendency to allocate towards ‘passive’ structures such as ETFs and indexed funds, with an increasing emphasis on thematic funds. How do you see the shift in investment patterns of investors especially with High-Net-worth individuals?
The rise in income coupled with financial literacy, investment awareness and availability of better data and technology has led to a shift in investment pattern across the spectrum, especially the HNI segment.
HNI’s always look to diversify their risks and allocate meaningfully to emerging investment opportunities. We have seen increasing interest in private credit, PE & VC on one side and some very select passive or active/ thematic strategies on the other end, thereby taking exposure in both private and public markets. Such diversification helps an investor in building a diversified portfolio with a better risk-adjusted return.
This diversification is also coming in on account of factor strategies, multi-factor strategies, quant models, and so forth. The industry is moving from plain vanilla products into more niche and sophisticated investments. How is Upwisery equipped to deal with this changing investment landscape?
We continuously evaluate the available opportunities in the market across different strategies. We understand that investor requirements are ever-evolving and dynamic. Regulatory and tax changes also impact investment choices. The core focus should be proper asset allocation which is in line with the investor risk appetite and liquidity requirement. Within that framework, one must constantly engage with top-quartile fund managers.
Disclaimer: (Please consult your tax advisor for taxation related queries and financial decisions.)
