International mutual funds have emerged as the best-performing mutual fund category over the past year, delivering an average return of 37.14% and outperforming every domestic equity fund category, an analysis by ETMutualFunds showed. The sharp outperformance has left many investors wondering whether they should increase their allocation to international funds or wait for better entry opportunities. Market experts say that the recent rally in international mutual funds has been largely supported by the continued strength of global technology stocks, particularly companies benefiting from the artificial intelligence (AI) boom and currency movements have also played a role, as the depreciation of the rupee against the US dollar has boosted returns for Indian investors holding overseas assets.Also Read | NFO Insight: Can AlphaGrep's algorithm-driven multi-asset fund deliver better risk-adjusted returns? Rajesh Minocha, a Certified Financial Planner (CFP), Founder of Financial Radiance told ETMutualFunds that recent strong performance has been driven by gains in global tech stocks, particularly AI-related companies, and a resilient US economy. Additionally, a weaker rupee has boosted returns for Indian investors, with support from improved sentiment in some overseas markets. However, investors should not assume recent gains will continue. International diversification should be part of a long-term asset allocation strategy, not a short-term tactic, Minocha further said.Amitabh Lara, Executive Director, Anand Rathi Wealth Limited shared with ETMutualFunds that this performance has not been broad based across global markets. Most of the international funds available to Indian investors are investing in the US market, where returns have been driven largely by the AI led rally in technology stocks. Apart from this, Taiwan has also delivered strong performance supported by rising global demand for semiconductors.Amitabh further said that investors should avoid increasing exposure to international funds solely because of their recent outperformance, as investment decisions should be guided by long-term asset allocation rather than short-term returns and given the familiarity and accessibility of Indian markets, investors may be better served by focusing on domestic opportunities while using international funds primarily for diversification. International funds vs domestic equity: Which offers better long-term opportunities?The analysis by ETMutualFunds further showed that international funds have outperformed their domestic counterparts in the last six months and three years along with outperforming them in the last one year. In the last six months, international funds delivered an average return of 17.26% and in the last three years, these funds delivered an average return of 23.42%. In longer horizons such as the last five or 10 years, international funds were at the third last position in the return chart. With international funds outperforming domestic mutual funds in several different horizons, many investors are questioning whether global markets are now better placed than Indian equities. or could Indian markets catch up over the next few years?Amitabh Lara said that while international funds have outperformed over the past year, recent returns alone should not drive investment decisions and domestic equity funds remain well placed for long-term wealth creation, supported by India's growth story and a broader investment universe. “Investors should follow a disciplined asset allocation, with around 80% in equities, comprising 50–55% large caps, 20–25% mid caps, and the remainder in small caps.”Minocha said that this is not an either-or decision as domestic and international markets move in different cycles, sometimes independently or even in opposite directions. He further said that India continues to benefit from structural advantages such as favourable demographics, rising consumption, manufacturing growth, and infrastructure investment and international markets, on the other hand, provide access to sectors and companies not available locally, including global technology leaders so maintaining a mix of domestic and international equities can enhance diversification and improve risk-adjusted returns over time.Also Read | 12 equity mutual funds deliver over 15% XIRR on SIP investments in 3 years. Are there any included in your portfolio? Limit imposedSeveral international mutual fund schemes have restricted fresh inflows over the past year or past few months after the industry was about to hit the RBI-prescribed overseas investment limit. Although some fund houses have resumed subscriptions in select schemes, access remains limited in certain cases. Some fund houses such as Edelweiss Mutual Fund, the maximum systematic investment plan (SIP/)systematic transfer plan (STP) of Rs 5,000; for PGIM Mutual Fund schemes: maximum SIP/STP of Rs 2 lakh; for Franklin Mutual Fund schemes, maximum Rs 5 lakh, lumpsum and maximum Rs 50,000 SIP/STP.PGIM India Mutual Fund has reopened subscriptions in its three international funds for the second time in CY26. Axis Mutual Fund announced temporary suspension of subscription to units in Axis Global Equity Alpha Fund of Fund, Axis Global Innovation Fund of Fund and Axis Greater China Equity Fund of Fund with effect from May 13. Axis Mutual Fund has temporary suspended subscription in its three international funds and removed Rs 1 lakh per PAN per month limit earlier applicable.Alternatives for global exposureRBI has imposed limits on overseas investments for domestic mutual funds. This is currently capped at $7billion for the entire industry, with each asset management company allowed to invest up to $1 billion in foreign securities. Several fund houses have kept SIPs largely open, whereas lump-sum investments are still restricted in many schemes. Unlike domestic equity and debt mutual funds, international schemes are governed by an industry-wide overseas investment limit. After this limit was exhausted in 2022, several fund houses suspended or restricted fresh subscriptions to remain within the prescribed ceiling.Minocha said that investors can consider international FoFs open to investment and another approach is to access international markets through regulated structures, such as those associated with GIFT City, where appropriate. The minimum investment, which will be made by a lump sum only, could be a very high amount, regardless of the route, decisions should not be based solely on availability and the chosen product or structure must align with the investor’s asset allocation, risk tolerance, and long-term objectives, Minocha further said.Lara said that Indian markets remain well placed for long-term wealth creation. Investors seeking global diversification can limit international exposure to 5–10% of their portfolio. If international funds are closed to fresh subscriptions, alternatives include domestic schemes with overseas exposure or direct investing via the LRS and the objective should be diversification, not chasing returns. Also Read |Why is Parag Parikh Flexi Cap Fund still a top recommendation despite underperformance? Expert explains International performersAround 61 international funds have completed one year of existence in the industry, of which Nippon India Taiwan Equity Fund delivered the highest return of around 174.64% in the last one year. Motilal Oswal Nasdaq 100 FOF gave 72.82% return.Kotak International REIT Overseas Equity Omni FOF delivered the lowest positive return of around 10.97% and Mirae Asset Hang Seng TECH ETF FoF lost 1.80% in the last one year.Lara said that artificial intelligence has been a key driver of international market returns in recent years, although some consolidation is possible after the sharp rally and instead of chasing themes or countries, investors should focus on diversified equity funds for long-term wealth creation. Indian markets continue to offer strong long-term opportunities, while international exposure, if any, should be limited to 5–10% of the portfolio for diversification, preferably through US-focused investments, he further said.Minocha said that the US remains attractive due to its leadership in artificial intelligence, technology, and healthcare innovation, as well as the presence of high-quality global companies. Japan also offers opportunities, supported by corporate governance reforms, while certain European markets present reasonable valuations. “Rather than making concentrated country bets, most investors benefit from diversified global funds that spread risk.”He further said that the long-term outlook for international funds is positive, primarily as a diversification tool and maintaining a strategic allocation of around 10% of the equity portfolio to international assets can help reduce concentration risk and strengthen resilience across market cycles.(Disclaimer: Recommendations, suggestions, views and opinions given by the experts are their own. These do not represent the views of The Economic Times)If you have any mutual fund queries, message on ET Mutual Funds on Facebook/Twitter. We will get it answered by our panel of experts. Do share your questions on ETMFqueries@timesinternet.in along with your age, risk profile, and Twitter handle.