Why do some International Funds open for lumpsum and SIPs?

If you invest in International funds and ETFs you must have noticed something interesting. Some of these funds stay open only for a short time, close and reopen again. Before you have an opportunity to invest you might find they’re closed.

It feels like trying to grab tickets for a blockbuster movie that sells out in seconds. Why do many international funds and ETFs stop fresh subscriptions? Does this mean you are missing out on opportunities to earn higher returns? Let's find out.

First lets go behind the scenes. 

When you invest in "International Funds," you aren’t paying US Dollars to invest in foreign stocks. You are paying Indian Rupees (INR), to an Indian mutual fund which converts those rupees into US dollars to buy foreign stocks.
 

International funds may invest your money globally (companies across the world, country-specific like only US stocks or regionally only latin america or the greater china region.

Some international funds invest in foreign mutual funds instead of directly investing in foreign stocks. They are called Fund of Funds (FoF) which means one mutual fund scheme investing in another mutual fund scheme.

On the other hand International ETFs (Exchange Traded Funds) invest your money in foreign stocks or foreign stock market indices like the Nasdaq-100, S&P 500 etc.

The main difference between international funds and international ETFs? 
 

You can buy and sell International ETF units through your demat account on Indian stock market exchanges just like Indian shares.

In a nutshell, every international fund unit you hold represents a tiny slice of a foreign stock or a fraction of foreign mutual fund. 

International mutual funds must convert Indian Rupees to US dollars or other foreign currencies to buy foreign stocks. When many people chase international funds it increases demand for US dollars which leads to the weakening of the rupee against the dollar.

RBI wants to protect the rupee and along with SEBI has imposed a $7 billion industry-wide limit on overseas investments for the mutual fund industry. No single AMC can cross $1 billion on its own and there is a  separate $1 billion limit for investments in overseas ETFs.

Many International funds and ETFs stop new lump sum and SIP subscriptions as they approach the legal investment limits.

In a nutshell, international mutual funds don’t stop fresh subscription because SEBI doesn't want you to invest abroad or because the US market has become risky. It's just a defense mechanism to protect the rupee from falling against the US dollar. 

Some international funds reopen for a few days because they have space to accept fresh investments. Existing investors may have sold their units and international funds want new investors to invest to fill this limit.

Should you chase these international funds? An international fund reopening for new subscriptions doesn't mean global markets are cheap. It only signals that the fund has space for fresh investments.

If global stock markets are overvalued and you end up investing in international funds at a higher NAV (Net Asset Value) a major crash could lead to a heavy loss.

When it comes to International ETFs they work in a different way. Market makers which are large financial companies create ETF units against a specific basket of foreign stocks in specific quantities. You can buy these International ETF units on stock exchanges just like shares.

International ETFs have two prices. A real-time market price at which you can buy and sell units on stock exchanges determined by the demand and supply. The NAV (Net Asset Value) which shows the true value of the securities (foreign stocks) held by the ETF which is calculated at the end of the trading day.

You can estimate an ETFs real time value by checking its indicative NAV (iNAV) which is a real time estimate of its NAV throughout the trading day. ETFs whose market price is higher than their iNAV trade at a premium. Those with a market price lower than iNAV trade at a discount.

Many international ETFs trade at a higher market price than the iNAV. This is because when international ETFs come close to breaching the investment limit, market makers cannot create fresh ETF units. If demand outstrips supply it creates an artificial shortage leading to ETFs trading at a higher market price than its iNAV.

You must check the iNAV of international ETFs which open for fresh subscriptions for a short time. You could avoid investing if the market price of the ETF is much higher than its iNAV. If you invest in an international ETF whose market price is way above its true value as shown by the iNAV, you are paying a higher amount for the ETF. You could suffer a heavy loss if the market price of the International ETF crashes. 

• Do not invest in international mutual funds and ETFs just because they open for a short time. 

   

• Check if the foreign stock markets are overvalued and invest only if you can do so at the right valuations. 

   

• Always check the iNAV of international ETFs and compare against the market price. 

   

• Avoid investing in international ETFs whose market price is way above their iNAV. Otherwise, you could suffer a loss if the market price crashes.