Time to remove restriction on investments in global funds

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Domestic investors, of late, are keen to invest in overseas stocks such as Apple, Walmart, Amazon, Berkshire Hathway, Google and Meta Inc (Facebook) etc. While some can afford to dabble in them directly through brokerages that have tie-ups with global entities, smaller investors prefer to participate through mutual funds investing overseas.

Despite the current meltdown with global stocks, which have fared poorly compared to domestic markets, domestic investors’ interest has not waned in overseas stocks.

Slew of global funds

Seeing the interest of investors, asset management companies too tried to capitalise their mood by launching global schemes based on various themes. The year 2021 alone saw AMCs launching nearly two dozen international funds, mostly US-focussed and internet-theme based. The schemes included active funds, index funds, ETFs and fund of funds. In 2022 thus far, nearly 10 schemes from AMCs such as Navi Mutual Fund, Aditiya Birla AMC, Mirae, Quantum, Nippon Life, DSP Investment and HDFC, have either been launched or are on the cards.

Currently, there are over 60 overseas funds that focus on a range of countries from China, Japan Taiwan to US, and themes from pure commodity plays to innovative companies and blockchain.

It was in the 2007-08 Budget that India opened up overseas instruments for Indian investors with aggregate ceiling of $5 billion and within the overall limit, mutual funds were allowed to a maximum of $300 million per mutual fund. The overall ceiling for investment in overseas ETFs was fixed as $1 billion, subject to a maximum of $50 million per mutual fund.

In November 2020, these limits were increased a bit. MFs were allowed a maximum of $600 million per scheme and the overall industry limit raised to $7 billion. But, the ceiling on overseas exchange traded fund was restricted to $200 million per MF, within the overall industry limit of $1 billion. Again, in June 2021, SEBI restored the limit to $300 million per MF in overseas Exchange Traded Fund (ETF) while retaining the overall industry limit of $1 billion.

Investment cap

As schemes hit the individual cap of $300 million, SEBI has asked fund houses to stop accepting funds for these schemes. Meanwhile, because of correction in the US markets, many US-focused funds have lost huge value .

According to Value Research, a MF tracking platform, these funds posted an average return of 7 per cent CAGR over a 10-year period. These funds slumped 19.26 per cent, year to date. Funds such as Invesco Global Consumer Trends FoF, PGIM India Emerging Markets, PGIM Ind Global Equity Opportunities and Edelweiss US Technology Equity FoF have posted a negative return of over 30 per cent in the last one year.

For investors who had thought through their overseas exposure, the fall represents a  a good opportunity to add to their holdings or average their costs. However, as the restriction still continues, investors are unable to average their cost or make fresh investments. Time has come to relax the restriction, so that investors can make use of the current fall to accumulate world’s top stocks through the mutual funds route.

Besides, the RBI and SEBI should immediately consider increasing the overall global investment cap of mutual fund industry from the current $7 billion.

Published on June 17, 2022

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