Are you looking to diversify your portfolio with International Funds? You may have to temporarily shelve this plan as SEBI has placed restrictions on overseas investments by mutual funds. The Securities and Exchange Board of India, SEBI, has set a limit of US$7 billion for investments in overseas funds and securities for the mutual fund industry. Moreover, there is a separate cap of US$1 billion for investments in overseas securities and funds per mutual fund house. Mutual fund schemes investing in overseas Exchange Traded Funds or ETFs also have a separate limit of US$1 billion. As the mutual fund industry has almost breached the US$7 billion mark, AMFI has asked mutual fund houses to temporarily stop accepting fresh investments into mutual fund schemes investing overseas from 02 February 2022. How do these restrictions impact you?
How do SEBI restrictions impact mutual fund houses?
Many mutual fund houses have stopped accepting fresh lump sum investments into their mutual fund schemes that invest in international securities. Moreover, AMCs have suspended new registrations in Systematic Investment Plans (SIPs) and Systematic Transfer Plans (STPs) for their International mutual fund schemes. However, AMCs will continue existing SIPs and STPs in their mutual fund schemes that invest overseas.
Many Indian AMCs have Fund of Funds (FoF) schemes that invest in overseas mutual funds. It helps you get exposure to foreign stocks. Moreover, the Indian AMC doesn’t have to monitor the overseas investment performance daily. However, SEBI restrictions will temporarily impact mutual fund houses as fresh investments won’t flow into their International mutual fund schemes.
The mutual fund industry views SEBI restrictions on overseas investments by mutual fund houses as a temporary problem. For instance, RBI set the overseas investment limit of US$7 billion in April 2008 when mutual funds Assets Under Management AUM was Rs 5 lakh crore. However, mutual funds currently have AUM close to Rs 38 lakh crore. Moreover, AMCs are hopeful that SEBI will soon lift the restrictions on the limit of overseas investments.
What is the impact of SEBI restrictions for investors in International Funds?
You will not be able to make fresh investments in mutual fund schemes with exposure to foreign stocks from 02 February 2022. Moreover, you cannot register new SIPs and STPs into mutual fund schemes that invest abroad.
If you are comfortable investing directly in foreign stocks, you could use RBI’s liberalised remittance scheme or LRS. It helps Indian citizens remit a maximum of $250,000 in a financial year to purchase foreign securities in a foreign currency. Moreover, this is a separate limit that doesn’t fall under SEBI’s current limit of US$7 billion. However, you must invest directly in foreign stocks only if you understand the investment.
If you want to invest in foreign stocks through the mutual fund route, you must wait till SEBI increases the overseas investment limit. However, you can opt for ETFs that focus on foreign stocks as it has a separate limit of US$1 billion, which is yet to be exhausted.
You are free to redeem your investments in mutual fund schemes that invest overseas if they do not accept fresh investments. However, you could stay invested if you seek to diversify your portfolio with International Funds. In a nutshell, you could wait until SEBI lifts restrictions on overseas investments for mutual funds before investing in International Funds.
For any clarifications/feedback on the topic, please contact the writer at cleyon.dsouza@cleartax.in
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