Mutual funds unlikely to get a raise in overseas investment cap

view original post

Indian regulators are unlikely to permit any increase in the limit on mutual fund investments in overseas assets, in part because it could further pressure the rupee which is already at historic lows, said two people familiar with the matter.

There is a cap of $7 billion on total investments by Indian mutual fund schemes in foreign funds which actually hold the assets. There is a separate limit of $1 billion for local funds that invest in foreign exchange-traded funds (ETFs). A collapse in the value of some of those schemes has led to a demand for higher limits to help investors bring down their average investment cost.

“While Sebi (Securities and Exchange Board of India) has been in favour of an increase in the limit to help mutual funds to

garner more funds, the central bank is reluctant to raise the limit,” said one of the people.
The regulators may also see no need to raise the limit because Indians could use other routes, such as the liberalised remittance scheme (LRS) that allows resident Indians to freely remit up to $250,000 a financial year, to invest overseas, the person said.

The rupee hit a new low of 78.28 to the dollar on June 13, hurt by large capital outflows from foreign portfolio investors amid a sudden shift in global financial market conditions due to the rollback of extraordinarily easy monetary policies to fight inflation. Foreign investors have already sold a record $27.3 billion of Indian securities this year. If domestic investors now also begin to allocate higher resources for overseas stocks, it could further weigh on the local currency and the RBI particularly is unlikely to favour that.

The RBI and Sebi did not reply to ET’s queries.

Overseas schemes of mutual funds late last fiscal year reached the prescribed limit of $7 billion, as investors piled on to benefit from a bull market in the US. Mutual funds have since stopped accepting fresh money into those schemes as the RBI did not lift the cap. The industry has been lobbying for a higher limit.

Indian mutual funds hawk at least 65 global funds to domestic investors. These have assets under management of Rs 34,278 crore ($4.39 billion) as of last week, based on their net asset value. While they can retain any appreciation in the asset value beyond $7 billion, a fall in the value of their holdings does not allow them to invest more.

Investors who are looking to add more to overseas investments are shut out because of the nominal limit.

“It is natural for them to diversify investments overseas where they seek higher returns from

stocks,” said a fund manager, who is associated with such an offshore fund.

About four months ago, the Association of Mutual Funds in India had written to the RBI requesting to raise the limit. It also held discussions with Sebi.

These types of funds are of two types: active and passive. While a fund of funds is of passive nature, investment through ETFs is active. Each fund house can use up to $1 billion of the outstanding limit and $300 million for ETFs every year. It is not valued on a uniform exchange rate.

Aditya Birla, Axis, DSP,

, Franklin Templeton,

, Kotak

, Nippon and

are among local fund houses that run mutual fund plans that invest in offshore securities, show data from industry tracker Value Research.

In three years to June 16, 2022, some of the funds like DSP World Mining Fund have returned as much as 21.9%.

Launched in January this year, ICICI Prudential Metals and Energy Equity plan yielded 39% until the second week of June, but a crash in global indices following 40-year high inflation in the US pulled it down to 22.5% as on Friday.