Lumpsum investments in MF schemes with overseas exposure has been paused. Here’s why

Investors will for now not be able to make lumpsum purchases or switch-ins in mutual fund schemes with exposure in securities and instruments abroad.

Market regulator Securities and Exchange Board of India (SEBI) and the Association of Mutual Funds in India (AMFI) have asked them to temporarily stop fresh investments with the total investment limit close to breaching the cap set by the Reserve Bank of India.

What is the RBI rule?

Indian mutual funds registered with SEBI are permitted to invest within an overall cap of US $ 7 billion, the RBI says in its Master Circular issued on January 1, 2016.

Overseas investments include ADRs, GDRs, debt securities, short-term deposits in banks abroad, investments in units of overseas mutual funds, and money market instruments.

Lumpsum investments in MF schemes with overseas exposure has been paused. Here’s why

A limited number of qualified Indian mutual funds are permitted to invest cumulatively up to $ 1 billion in overseas exchange traded funds as may be permitted by the SEBI, the RBI says.

But with the MF industry close to breaching the limit, the AMFI, following a directive from SEBI, has asked MFs with overseas exposure to temporarily stop lumpsum purchases and switch-in from other schemes with effect from February 2.

How do Indian MFs operate abroad?

The global exposure of Indian mutual funds is normally through Fund of Funds (FoFs). This means an Indian AMC floats a fund in India after obtaining permission from SEBI, and mobilises money from local investors to invest in an international mutual fund.

“This is less risky as the Indian AMC doesn’t need to monitor the performance of its overseas investment on a daily basis. Many Indian MFs have floated such FoFs for investing in overseas funds, which in turn invest in stocks listed on the New York exchange and Nasdaq,” a fund manager said.

The Fund of Funds gives Indian investors an opportunity to invest in global innovators such as Amazon, Facebook, VISA, AstraZeneca and Netflix. Indian MFs have floated around two dozen overseas investment schemes in the last one year, and achieved returns in the range of 17-23 per cent.

How has the quantum of overseas exposure changed over time?

Foreign assets of mutual funds stood at Rs 20,865 crore ($2.9 billion) at the end of March 2021, a big increase from Rs 5,808 crore in March 2020, according to the RBI.

While the latest data are not available, fund houses estimate that overseas investments would have crossed Rs 50,000 crore ($ 6.7 billion) as global markets had witnessed a bull run till December.

Overseas equity investments of MF companies are largely concentrated in the US and Luxembourg. Investments in the US shot up 272 per cent to Rs 9,029 crore in March 2021 from Rs 2,427 crore in March 2020.

Luxembourg accounted for Rs 8,867 crore of Indian MF investment as against Rs 2,536 crore a year ago, a rise of 249 per cent, the RBI said.

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Will RBI increase the overseas investment limit?

Mutual funds expect the RBI to increase the overseas investment limit from $ 7 billion to at least $ 15 billion. The $ 7 billion cap was fixed by the RBI five years ago in 2016.

However, it’s to be seen whether the RBI will raise the limit, given the volatility in the overseas markets in the wake of the Federal Reserve deciding to tighten liquidity and raise interest rates.

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