Did You Know | MFs investing abroad can refuse you units

Did You Know | MFs investing abroad can refuse you units

As much as mutual funds (MF) would want you to invest in schemes that invest abroad, there may come a time when your fund refuses your application. Though by the looks of things, that day is far away.

Why it may happen

The capital market regulator, the Securities and Exchange Board of India (Sebi), in consultation with the central bank, Reserve Bank of India (RBI), allows Indian-domiciled MFs to invest up to $7 billion (Rs31,101 crore) in foreign securities abroad. Further, a single MF company (all its underlying schemes put together) cannot invest above $300 million outside the country. In case the investment reaches the prescribed level, the MF company has the right to suspend subscription temporarily. Hence, even if you have opted for a systematic investment plan, you would not be able to invest. The same rule is also applicable on lump sum investments.

In India, currency inflows and outflows is monitored by RBI. While it is possible to spend as much as you can within India—provided you pay taxes as and when required—there are restrictions to what and how much you can buy abroad. Since the Indian rupee is not yet fully convertible—in other words you can’t buy just about anything you wish to buy abroad—RBI has placed restrictions on how much you can invest. You cannot, for instance, buy a house abroad at one shot or let’s say, as easily as you can in India.

The present scenario

The reality is that not many Indian investors are interested in investing abroad. With Indian stock markets having returned 451%, 78% and 33% in the past 10, five and three years, respectively, investors have made a lot of money by staying invested in India. Precise data is hard to come by given that the initial investment value (and not present investment value) is supposed to be compared with the overall limit to check any breach, but fund houses and independent data providers estimate that fund houses have not yet exhausted their upper limit.

Besides, with multiple fund houses launching foreign schemes that invest in emerging and developed economies, including specific countries like China, the choice for Indian investors have already widened.