SEBI restricts overseas investments by mutual funds – How it impacts you

SEBI restricts overseas investments by mutual funds – How it impacts you

The Association of Mutual Funds in India (AMFI) has instructed mutual fund institutions to halt new lump-sum deposits in international equity schemes. Additionally, the industry association has requested that mutual funds cease accepting new systematic investment mandates from investors. This suspension will take effect on Wednesday, February 2, 2022. This means that you can invest in these schemes until the cut-off time of 3 p.m. on February 1st.


SEBI, India’s capital market regulator, has set a ceiling of US $1 billion per fund house and US $7 billion for the mutual fund industry. Additionally, there is a separate maximum of US $ 1 billion for mutual fund schemes that invest in foreign exchange traded funds. Because the industry is on the verge of exceeding this US$7 billion cap, AMFI has issued this directive prohibiting new investment.



 

AMFI stated in a statement to fund houses this week: “AMCs shall not make any incremental investments in overseas funds or securities beyond what is existing as on February 1, 2022 at respective mutual fund level. In other words the total utilization of each AMC of the overseas limit shall be capped at the amount as of end of the day – February 1, 2022, in order to ensure compliance with the SEBI direction” AMFI noted.


Simply put, fund houses will be restricted from purchasing listed shares, securities, or units in schemes (other than exchange traded funds) beginning February 2, 2022. To be clear, only inflows into India-based mutual fund schemes that invest in foreign assets of other mutual fund schemes are temporarily halted. Funds investing in global ETFs will continue to receive contributions from investors.



 

Is it the end of the Journey for International Investing from India?



 

Yes, but just for the time being. From 2 February, investors cannot make lump-sum investments in these schemes. They are not eligible to join new systematic investment plans or systematic transfer plans in schemes that invest in foreign equities or feed into foreign mutual fund schemes, with the exception of ETFs. Fund houses and mutual fund distribution platforms will make required measures to prevent such investments from being accepted.


While it is permissible to continue with the existing SIP and STP for the time being, fund houses will eventually run out of options. After February 1,2022, fund houses are prohibited from making additional foreign investments. As a result, schemes that invest only in foreign securities in accordance with the asset allocation specified in the scheme information document will be required to discontinue collecting funds via existing SIP or STP.


Schemes that have the choice of allocating funds between Indian equities (or units of an ETF investing in foreign stocks) and foreign stocks must determine whether to invest the incremental funds in the former or the latter. If the fund managers are happy with that option and the SID approves it, they may continue to take SIP and STP flows. For example, PPFAS Mutual Fund declared on 2 February 2022, that it will cease accepting new lump sum contributions and new registrations of SIP and STP investments in its flagship Parag Parikh Flexicap Fund. According to a distributor with knowledge of the fund house’s thinking, PPFAS MF wishes to maintain the scheme’s characteristic of investing up to 35% in overseas shares. Additional inflows in the future could affect asset allocation, he notes. However, the scheme would maintain existing SIPs and STPs.



 

Mutual fund houses have been requested to produce addenda for concerned plans regarding investment acceptance.


How have fund houses responded?


Motilal Oswal Mutual Fund has ceased accepting lump sum investments in three of its overseas schemes, the Motilal Oswal S&P500 Index Fund, the Motilal Oswal MSCI EAFE Top 100 Select Index Fund, and the Motilal Oswal Nasdaq 100 Fund of Funds, effective January 14, 2022. Additionally, it has discontinued producing units of the Motilal Oswal Nasdaq 100 ETF.


For the time being, DSP Global Innovation Fund of Funds has opted to alter its investing approach. Rather than investing in a combination of four overseas mutual fund units and two exchange-traded funds, it will invest exclusively in the units of two ETFs.


What about redemption ?


You are free to sell your assets in closed-end funds. You can also opt out of these schemes and join others. There are no limits of any kind. Each switch out or redemption, like any other sale of mutual fund units, is subject to an exit load and any relevant taxes.


When are they going to accept more investments?


The mutual fund industry is waiting for the regulator to increase the cap. The Reserve Bank of India is likely to take a decision on this industry-wide restriction on foreign investments. Industry sources believe the cap will be increased sooner and SEBI would notify investors, most likely following the announcement of the Union Budget 2022.


SEBI had already announced a US$1 billion increase in the foreign investment limit for each mutual fund firm in June 2021. Earlier this year, in November 2020, the ceiling for each fund house was quadrupled to US$ 600 million.

What are your options?

If you still intend to invest abroad, you have two options.

  • To begin, ETFs (such as the Nasdaq 100) are still available on Indian stock exchanges.
  • Purchase stocks directly – this may require some help from RIAs.

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