Indian Mutual Funds Limited on Overseas Investments

Indian mutual funds face limitations on overseas investments due to regulatory restrictions. The Securities and Exchange Board of India (Sebi) has directed a halt to new investments in schemes involving overseas exchange-traded funds (ETFs) as the existing $1 billion limit nears capacity. This follows the exhaustion of a separate $7 billion limit for direct foreign security investments in January 2022.

Regulatory Restriction:

The Securities and Exchange Board of India (Sebi) has directed mutual funds to stop accepting new investments in schemes that invest in overseas exchange-traded funds (ETFs). This comes as the existing $1 billion limit for ETF investments nears its capacity.

Background:

• This restriction follows the exhaustion of the $7 billion limit set by the Reserve Bank of India (RBI) for direct investments in foreign securities in January 2022. Since then, fresh overseas investments were only possible through redemptions in existing schemes.
• Sebi and some mutual funds have requested the RBI to raise the limit, but a decision is pending. RBI Governor Shaktikanta Das has indicated that exchange rate stability will be a key factor.

Industry Impact:

• This move effectively hinders international investment opportunities for mutual funds.
• The industry views a limit increase before the upcoming elections as unlikely. The current $1 billion is considered insufficient for the size of the Indian mutual fund market.
• Despite strong performance in the US market, overall international mutual fund assets haven’t grown significantly due to investor outflows. These outflows are attributed to both investment limitations and tax changes implemented in April 2023.

Additional Information:

• As of February 2024, international mutual fund assets under management (AUM) stood at Rs 24,700 crore, compared to Rs 22,700 crore in January 2022.

Conclusion

The restrictions effectively limit international investment opportunities for mutual funds. The industry views an increase in the limits before the upcoming elections as unlikely, and the current limits are considered inadequate for the size of the Indian market. Despite strong performances in some foreign markets, overall international mutual fund assets haven’t grown significantly due to investor outflows attributed to both limitations and tax changes. The future of international investment options for Indian mutual funds remains uncertain.