Mutual fund investors may be able to invest in overseas funds with India exposure

Indian mutual fund investors may have an option to enhance investment opportunities soon.

Markets regulator Securities Exchange Board of India (SEBI) suggests allowing domestic mutual funds to invest in overseas funds with limited exposure to Indian securities.

However, this investment should not exceed 20% of the overseas fund’s total assets.

Currently, domestic mutual funds can invest in overseas shares and assets, subject to an industry-wide cap of $7 billion. The Reserve Bank of India (RBI) has set this limit. However, the mutual funds had exhausted the permissible limit about two years ago.

Moreover, ambiguity related to rules prevails among domestic mutual funds when it comes to investing in overseas mutual funds (MFs), unit trusts (UTs), exchange-traded funds (ETFs), and index funds that include any kind of Indian securities.

This has largely deterred Indian mutual funds from investing in such overseas funds. The markets regulator’s recent proposal addresses this uncertainty among Indian mutual funds.

It has proposed certain guidelines for investing in overseas MFs and UTs. Also, it has put forward consequences of breach of exposure limit.

Of late, various international indices, ETFs, MFs, and UTs allocate a portion of their assets to Indian securities.

The allocation to Indian securities has steadily risen from about 8% in March 2018 to 15.88% in October 2023. The robust economic projections in the country may lead to a further increase in allocation by overseas funds and indices.

If the proposal materialises, then domestic mutual fund investors would get more opportunities for global diversification of their fund portfolios.

Also, it will provide investors with broader exposure to international markets. Thus, improving their ability to diversify as well as manage risk.

Furthermore, the initiative could attract foreign investment into the Indian mutual funds landscape.

Additionally, it could lead to a rise in domestic mutual funds launching fund of funds (FoFs) on the MSCI Emerging Market Index (MEMI).

With assets of $85 billion, the MEMI is a prominent benchmark among global investors seeking exposure to the emerging market asset class with countries and regions, such as China, India, South Korea, Taiwan, and Brazil.