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Why Investing in Foreign Markets Just Became Trickier for Indian Investors

Editor, TRANSFIN.
Feb 2, 2022 8:09 AM 4 min read
Editorial

Allocating assets to a mutual fund that invests in overseas securities is typically a smart investment decision. It enables you to tap into foreign markets + diversifies your portfolio.

However, as of today, you won't be able to newly avail such schemes - at least for now.

That's because, as directed by SEBI and the Association of Mutual Funds in India (AMFI) on January 30th, fund houses have been asked to stop accepting (1) new lump sum payments and (2) fresh SIP mandates in schemes that invest in overseas stocks.

Why?

Back in 2008, the RBI set an industry-wide "aggregate ceiling" for overseas investments by registered mutual funds of $7bn (plus a $1bn limit on overseas ETFs). This limit was itself an increase from the $5bn limit earlier, which in turn was an increase from the $4bn limit set before that. 

At the fund level, the cap was fixed by SEBI at $1bn (with the same for ETFs at $300m), revised from $600m and $300m prior.

But today, as mutual fund investments ballooned over the years and international bets grew in popularity (especially since the explosion in retail investor participation since 2020), these limits are close to being breached, at least at the industry level, if not at the fund level (95% there, reportedly). Ergo, the recent circular.

Fund houses and brokerages are scrambling to adapt. Some, like Motilal Oswal AMC, halted lump sum subscriptions for international schemes in January itself (the AMC has since also suspended ETF unit issuance after breaching its individual limit for the same). 

Here’s a list of funds impacted 

Also see a neat note by the CIO of PPFAS (pdf), one of the most popular overseas exposure mutual funds.

 

What’s Out and What’s Not?

Fresh lump sum investments have been stopped. As are fresh SIPs. As for existing SIPs, they are expected to proceed unabated. However, this would require some asset rejigging by fund houses: since they won't be able to invest the incoming capital in international securities, they might have to increase allocations to Indian stocks or ETFs.

To be sure, the recent AMFI directive only concerns schemes that invest in foreign securities; those that invest in foreign ETFs can proceed unfazed, since this limit is yet to be breached.

Also, if you're wondering if this is the end of the road for your dream to cash in on Apple's bull run, it's not. There are still other ways you can invest in foreign stocks. Moreover, the current restrictions are temporary, although when exactly they will be lifted is anybody's guess…

 

Raise the Roof

Moneycontrol cited industry insiders saying a decision on hiking the limit can be expected "most probably after the announcement of Union Budget 2022". 

Furthermore, last month a Business Standard report said the industry-wide limit could be raised from $7bn to as much as $15bn in the near-term. (The last time the fund-level limit was raised was in June last year, when it was increased from $600m to $1bn.) 

A limit hike would certainly be in tune with the times. As of December 2021, domestic mutual funds' estimate foreign equity holdings to stand at roughly ₹50,000cr ($6.7bn). To put that in context, a year prior this number was 3x smaller. Through 2020, the total number of Indian retail investor folios in overseas schemes almost tripled.

This jump was in large part catalysed by (1) the robust US market rally, with indices breaking records on a routine basis, and (2) a relatively weak Rupee, which amplified returns from Dollar-denominated assets.

Significantly, international-focused funds don't restrict themselves to US stocks but rather partake from a diverse basket of equities from exchanges in Europe, China, Brazil and Japan, among others (however, US-focused funds have grabbed the biggest piece of the pie). They also offer sector-obsessed investors sector-specific schemes (such as, say, technology or agriculture).

 

Read the Offer Document Carefully Before…

Over the past year, Indian mutual funds have floated as many as 23 global schemes. And most of these have so far yielded handsome returns in the 17-25% range, on average.

Which seems attractive, but foreign investing, quite like mutual fund investing, is “subject to market risks”. There are some important pointers to note.  

For starters, keep forex conversions in mind, since in this segment a strong Rupee isn't particularly good news for your NAV. Second, returns from these funds are treated as the same from debt funds, and as such they are levied a LTCG/STCG. Third, more diversification can also mean more risks. 

So, make sure you’re strong on your mutual fund basics before stepping abroad! Here’s a 10-point beginners’ guide to get you started.

FIN.
 

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