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The rule limiting MF investments in overseas assets came into effect in 2007-08. Mint
The rule limiting MF investments in overseas assets came into effect in 2007-08. Mint

MFs ask Sebi to relax cap on foreign investments

  • The overseas investment limit for an asset management firm is currently $300 million

Mutual funds (MFs) have approached the markets regulator to raise the current $300 million overseas investment limit of an asset management company as Indian investors develop a heightened appetite for risk-taking outside the country.

Stellar returns in the past decade have led to strong inflows into MF schemes investing abroad. In the fund of funds (FoF) category, overseas assets under management (AUM) touched 6,496 crore at the end of September, according to data from the Association of Mutual Funds in India (Amfi). This figure does not include funds that primarily buy local stocks, but also invest part of their corpus abroad.

The rule limiting MF investments in overseas assets came into effect in 2007-08. The industrywide limit was then set at $7 billion.

“Thirteen years later, things are obviously very different. We’ve reached about half the limit with $150 million. Nonetheless, we have sent a representation to Sebi, along with other MFs, to increase the limits wherever possible," Neil Parikh, chief executive officer of PPFAS Mutual Fund, said at the annual unitholder’s meeting on 24 October.

Over the past seven years, the Nasdaq 100 has delivered a compounded annual growth rate (CAGR) of around 22% in rupee terms, compared to around 11% for the Nifty. In 2020, while the Nifty delivered 4%, Nasdaq fetched 54%, driving interest in MFs investing in US stocks.

Motilal Oswal Asset Management Co., which has an exchange-traded fund tracking the Nasdaq 100 since 2011, followed it up with a similar product tracking the S&P 500 in April 2020. Axis Mutual Fund launched Axis Global Equity Alpha FoF on 24 September. The scheme had 887 crore in AUM on 30 September.

“The Indian markets may be close to their pre-covid peak, but US markets are far above their pre-covid peaks. Also, MF investors tend to be middle- or upper-middle-class folks who mostly are working from home and relying on tech firms such as Zoom, Microsoft, Google and WhatsApp (owned by Facebook) to go about their daily lives," said Amol Joshi, founder of Plan Rupee Investment Services, a MF distributor.

PPFAS Mutual Fund invests up to 35% of its assets abroad in PPFAS Long Term Equity, its flagship mutual fund scheme. It had an AUM of 4,798 crore as of 30 September. Franklin India Feeder Franklin US Opportunities Fund launched in January 2013 invests in American stocks. It had an AUM of 2,252 crore as of 30 September . To be sure, part of the AUM growth of such schemes also comes from investment returns, and not just inflows, and hence, the foreign investments of these fund houses are still below the cap of $300 million.

“If some fund is not using the limit, let us use the limit," said Parikh, referring to the fact that not all of India’s asset management companies have schemes investing abroad. “So far, there’s been no definitive answer. However, they’ve been pretty warm towards the idea, and we are hopeful that the limit will be raised at a certain time," he added.

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