What should investors of international mutual funds do?

SEBI, the market regulator, recently told mutual fund companies that their investment limits for assets outside of India are about to run out.

Padmaja Choudhury   /   February 8, 2022

The Securities and Exchange Board of India has advised fund houses to cease accepting new inflows into international funds and diversified funds that invest in foreign securities.

SEBI, the market regulator, recently issued a warning to mutual fund houses that the investment limits on overseas assets are nearing exhaustion. Each fund house can invest a maximum of $1 billion, and the overall industry can invest $7 billion in international securities. Besides the $7 billion, mutual funds can invest a maximum of $1 billion in exchange-traded funds or ETFs listed in other countries. These limits are determined indirectly by the Reserve Bank of India rather than by SEBI.

The Association of Mutual Funds of India (AMFI) has ordered mutual fund houses to not invest in international stocks until the limitations are amended. As a result, all fund houses have suspended accepting new inflows into any funds that invest in overseas securities (whether lump sum or Systematic Investment Plan/Systematic Transfer Plan). Depending on the fund house, existing SIPs and STPs might continue.

Because of the rising number of overseas funds and ETFs issued by fund houses, the AUM of international funds has increased. The overseas fund category’s AUM has increased from Rs 3,688 crore in December 2019 to Rs 39,658 crore in December 2021. These funds currently invest not only in the US market but also in Japan, Brazil, emerging economies, and Europe, among other places.

What should Investors do?

Investors with existing SIP or STP may not be hampered. Individuals cannot make a fresh lumpsum or SIP investment in the affected funds.

Because there is no opportunity for investors to migrate to another fund to gain foreign exposure, mutual fund experts say they should do nothing for the time being and stay put. The majority of fund managers and advisors believe the ban is just temporary. Many fund houses have sent letters urging their investors to stay put. You have no choice but to wait if you are a new investor looking to invest in overseas funds.

Investors can also postpone new investments in funds with restrictions or weigh the benefits and drawbacks of funds that allow international investments (like those investing in overseas ETFs).

As of December 31, 2021, 39 diversified equity funds (allocating at least 65% to Indian stocks) have an allocation to international equities, with a total investment of Rs 20,236 crore. These mutual fund schemes give investors geographic variety while keeping the taxation of equity money the same. The Parag Parikh Flexi Cap Fund is one that has invested roughly 30% of its total assets in US equities. It has a larger corpus committed to international equities than most specialised international funds.

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