Hybrid MFs with overseas exposure: Should you invest?

With international feeder funds still shut to fresh inflows, hybrid mutual funds that invest partly overseas are emerging as a backdoor for investors seeking global exposure.These schemes offer diversification and access to themes playing out in the US, China and Japan, but experts warn against over-allocation given elevated valuations and the risks of sharper drawdowns.

Indian investors eager to tap into global markets have faced hurdles since early 2022, when the Reserve Bank of India (RBI) capped the mutual fund industry’s overseas investments at $7 billion. Following this, the Securities and Exchange Board of India (SEBI) asked asset management companies (AMCs) to halt fresh inflows into international funds.

However, some hybrid and multi-asset allocation funds continue to provide partial exposure to international equities. These funds can still allocate a portion of their portfolio overseas, offering investors a chance to diversify beyond Indian markets.

Funds with highest exposure

Among the hybrid funds, ICICI Prudential Passive Multi-Asset Fund currently has the highest overseas exposure at 29.97%. DSP Multi Asset Allocation Fund follows with 18.64% invested overseas. Invesco India Multi Asset Allocation Fund has 14.42% in international assets. Bandhan Multi Asset Allocation Fund has 9.56% invested abroad. PGIM India Aggressive Hybrid Equity Fund comes next with 9.43%.

According to Sreepriya NS, CEO, Entrust Family Office, the $7 billion limit has not shut the door entirely on international investing. She explains that the RBI cap applies across feeder funds and hybrid funds with partial international exposure. Since exposures fluctuate with redemptions and market movements, AMCs may periodically find space to reopen international feeder funds. For domestic funds, managers can raise global allocations when headroom exists, and market corrections also create opportunities to buy overseas stocks at better valuations.

What experts say?

Sreepriya highlights that despite the restrictions, fund managers’ conviction and discipline remain key. “For investors, such funds offer diversification benefits by blending Indian equities with tactical international exposure. Some funds have illustrated this well, leveraging the overseas allocation window to generate long-term value,” she says.

International equities have had a strong run over the last couple of years, with the US, China, and Japan delivering robust returns. Funds with exposure to these markets have benefitted. But Vivek Banka, Founder, GoalTeller, cautions against chasing performance blindly. “These funds come with challenges. During bad times, they can lose much more than their Indian counterparts, especially since some of these markets could be in bubble territory. For instance, the Nasdaq is being propelled by the AI boom, but any negative surprise here could trigger sharp drawdowns,” he says.

Banka believes international diversification still has merit if done prudently. “Investors with zero overseas exposure can explore these hybrid funds to diversify across geography, currency, and themes. But they should limit allocation to not more than 10% of their portfolio. A staggered investment approach is advisable given the elevated levels of global markets,” he adds.

Final thoughts

Hybrid and multi-asset allocation funds with overseas exposure remain one of the few avenues for Indian investors to access international markets under the current cap. They provide a balance of domestic and global equities, while also mitigating some risks by not being fully exposed abroad.

However, experts advise caution. Investors should treat such allocations as part of their overall asset allocation rather than investing in them only for the foreign exposure.