Business News/ Mutual Funds / News/  Sebi restricts overseas investments by MFs; what should investors do

The Securities and Exchange Board of India (Sebi) advisory for mutual funds to stop further investments into foreign stocks has come as a jolt for Indian investors who have taken up global diversification in a big way over the past few years.

Mint on Sunday reported that the markets regulator has advised mutual funds to stop further investments into foreign stocks to avoid breach of industry-wide overseas limits. Even, the Association of Mutual Funds in India (Amfi), has decided to cap individual mutual funds overseas investment limit as of 1 February.

Earlier, PPFAS Mutual Fund had stopped accepting inflows into PPFAS Flexicap Fund, which invests up to 35% of its corpus in foreign stocks, primarily stocks of US companies. Even DSP Investment Managers has reduced the number of underlying funds in its DSP Global Innovation Fund of Funds to exchange-traded funds (ETFs).

The regulator has specified an overall industry level limit of $7 billion for mutual funds to invest in overseas securities and funds and a separate limit of $1 billion for invest in overseas ETFs.

While the ETF limit is still some distance away, other international strategies have seen healthy flows and the limit of $7 billion is likely to get exhausted soon.

Experts believe that the restriction is a big negative for investors. “We have been seeing the markets being volatile right now, whether it is China or the US. This is the right opportunity to start investing in segments having reasonable or low valuations, especially lump sum. When the US Federal Reserve starts to increase the rates and if the markets actually fall, with restrictions in place, investors won’t get the opportunity to invest during dips. This is kind of a lost opportunity," said Rushabh Desai, founder of Rupee With Rushabh Investment Services.

Industry experts are of the opinion that Sebi and the Reserve Bank of India would soon increase the limit to overseas investments across fund houses since the current $7 billion limit represents a drop in the bucket.

“For example, today, the global market capitalization is close to $93 trillion and India represents 3% of that market cap. In addition, India has seen record foreign asset inflows and increase in foreign reserves," said Vaibhav Porwal, co-founder, dezerv, a wealth–tech firm.

According to Porwal, in the meantime, investors who seek alternate ways to invest in overseas securities may avail of RBI’s liberalized remittance scheme. Under the LRS, resident Indians can remit up to $250,000 in a financial year towards purchase of foreign securities and funds in foreign currency.

This limit is separate and does not fall under Sebi’s current limit of $7 billion for Indian mutual funds.

However, for retail mutual fund investors who want to cut the risk of direct investment, there may not be any other option but to wait for Sebi increase the overseas investment limit.

“If someone is looking for global exposure, then I don't think they should compromise investing in domestic funds because globally there is a low correlation between India and the US, for example. So, if someone is looking to have global exposure, I think they should wait and not just jump into any domestic fund at this point of time," said Desai.

Abhinav Kaul
Abhinav Kaul writes on cryptocurrencies and mutual funds at Mint. His previous stints include ETMarkets, Reuters Bangalore and Press Trust of India.
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Updated: 31 Jan 2022, 02:08 PM IST
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