Does re-opening of International Funds help investors?

SEBI, the capital market regulator in India, asked mutual fund houses to halt new subscriptions in mutual fund schemes that invest in foreign stocks in January 2022. The mutual fund industry had crossed the mandatory foreign investment threshold of $7 billion. After the SEBI directive, the Association of Mutual Funds in India (AMFI) ordered mutual fund houses to stop accepting fresh investments in mutual fund schemes that focus on overseas stocks from February 2022. However, after the recent crash in global stock markets, the cumulative value of investments of all mutual fund houses combined has gone below the $7 billion thresholds. According to SEBI rules, mutual fund schemes can resume subscriptions in overseas securities up to the available headroom without breaching the overseas investment limit. Does the reopening of International Funds help investors?

Why did international funds reopen their doors to investors?

After the SEBI directive, international funds temporarily suspended investments in overseas stocks as the total limit of $7 billion was about to be breached. It stopped mutual fund schemes investing in overseas stocks from taking money from investors through lump sums or systematic investment plans or SIPs. 

It helps to understand that the threshold limit of $7 billion still stands. However, there is a slight change. SEBI has allowed mutual fund houses to resume subscriptions and invest in overseas securities. 

However, global stock markets crashed after February 2022 due to the Russia-Ukraine crisis. Moreover, the US and other developed economies are hiking interest rates to control surging inflation. Now, mutual fund investors are redeeming their units forcing International Funds to sell their holdings and repay investors. Now, SEBI has allowed mutual funds to use this extra headroom in the foreign investment limit because of investor redemptions. 

Which International Funds are open for investors?

As SEBI has allowed fresh inflows only up to existing limits, every mutual fund house must decide depending on its headroom. For instance, three types of mutual fund schemes offer exposure to foreign stocks. 

Mutual Fund schemes that purchase units of exchange-traded funds or ETFs listed in foreign stock markets. These had a different limit of $1 billion, which hadn’t been breached. For instance, these schemes can accept fresh inflows from investors. 

Another type of mutual fund scheme is those investing in foreign stocks or fund scheme units. These mutual fund schemes had stopped accepting investors’ money from 01 February 2022. Finally, the third type of mutual fund scheme invests in a mix of foreign stocks and domestic equities. These mutual fund schemes remained open for investors even after 01 February 2022. However, they did not purchase foreign stocks in the interim period. 

Does the reopening of International Funds help investors?

Investing in foreign stocks helps diversify your portfolio beyond Indian equities. For instance, financial advisers recommend that you may invest 5%-10% of your equity portfolio in International Funds. International Funds will spread your investment across different geographies. 

Moreover, you get an opportunity to invest in global business giants and niche businesses currently unavailable in India. International Funds allow you to gain exposure to a foreign currency such as the US Dollar. It helps if you expect to incur expenses in US Dollars in the future. 

The correction in global stock markets gives you opportunities to invest in International Funds for the long term. However, International Funds are suitable only if you understand foreign stock markets. You could consider staggering investments in International Funds to get the requisite holding.

For any clarifications/feedback on the topic, please contact the writer at cleyon.dsouza@clear.in