SEBI Restricts Overseas Investment by Mutual Funds, What Should Investors Do
Moneylife Digital Team | 12 February 2022
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Market regulator Securities and Exchange Board of India (SEBI)’s recent advisory for mutual funds to stop further investments into foreign stocks came as a rude shock for Indian investors who have taken up global diversification in a big way over the past few years.
 
SEBI has advised mutual funds investing in overseas securities to stop further investments in foreign stocks to avoid breach of industry-wide overseas limits. 
 
Following the SEBI directive, the Association of Mutual Funds in India (AMFI) too asked fund houses to stop accepting flows in schemes investing overseas from 2nd February. However, existing SIPs and STPs have been allowed to continue but AMFI decided to cap individual mutual funds overseas investment limit as of 1st  February. The suspension is likely to be temporary and could be revoked once the limits are enhanced by the regulator.
 
Mutual funds can make overseas investments up to $1 billion per fund house, and the overall industry limit of $7 billion, as per the SEBI circular dated 3 June 2021. There is also a separate limit of US $ 1 billion for mutual fund schemes investing in exchange traded funds (ETFs) listed overseas. 
 
While the ETF limit is still some distance away, other international strategies have seen healthy flows and the mutual fund industry has almost reached this limit of US$7 billion. Hence, AMFI  issued this direction of not accepting fresh investments.
 
This means the fund houses cannot buy listed shares or securities or units of schemes overseas (other than exchange traded funds) from 2 February 2022.
 
However, only inflows in India-based schemes that invest in international securities of other mutual fund schemes abroad is stopped, temporarily. The funds that invest in global ETFs, will continue to accept money from investors.
 
What this means for investors
 
Investors cannot make lumpsum investments in these schemes from 2nd  February. They cannot sign up for fresh systematic investment plans (SIPs) and systematic transfer plans (STPs) in schemes that are investing in overseas stocks or feeding into mutual fund schemes overseas, except ETF. The fund houses and the mutual fund distribution platforms have made necessary changes to not accept such investments.
 
Though it is allowed to continue with the existing SIP and STP for time being, the fund houses will hit the wall. The fund houses are not allowed to make incremental investments overseas after 1 February 2022. Hence schemes that invest only in overseas securities as per the asset allocation mentioned in the scheme information document, have been forced to stop accepting money through existing SIP or STP.
 
Schemes that have the option to allocate money between Indian stocks (or units of ETF investing in overseas stocks) and the overseas stocks, had to decide if they want to invest the incremental money into former. If the fund managers are comfortable with that choice and the SID permits that then they can continue with accepting flows through SIP and STP. Mutual fund houses have been asked to issue addenda for schemes that are getting affected about the acceptance of investments.
 
Franklin Templeton Mutual Fund released a notice announcing suspension of lump-sum subscription, switch-ins, and fresh registration of SIP/STP for its three overseas funds, Franklin India Asian Equity Fund, Franklin India Feeder-Franklin US Opportunities Fund and Franklin India Feeder -Templeton European Opportunities Fund, after 28 January 2021. 
 
The fund house temporarily withdrew the notice, but may be forced to reinstate it after the AMFI guidance.
 
The Franklin Templeton move followed that of Motilal Oswal AMC, which also suspended lump-sum investments into three of the international schemes Motilal Oswal S&P500 Index Fund, Motilal Oswal MSCI EAFE Top 100 Select Index Fund and Motilal Oswal Nasdaq 100 Fund of Fund. It has also ceased creating units of Motilal Oswal Nasdaq 100 ETF its overseas funds with effect from 17th January.
 
Earlier, PPFAS Mutual Fund had stopped accepting inflows into PPFAS Flexicap Fund, which invests up to 35% of its corpus in foreign stocks, primarily stocks of US companies. DSP Global Innovation Fund of Fund has decided to alter its investment strategy for time being. Instead of investing in a mix of four overseas mutual fund units and two ETFs, it will allocate the money to the units of two ETF only. 
 
What can investors do?
 
Investors are free to sell their investments in schemes which are not accepting fresh investments. They can also switch out from these schemes to other schemes as well. There is no restrictions of whatsoever nature. Like any other sale of mutual fund units, each switch out or redemption is subject to exit load and taxes applicable.
 
If you still wish to invest overseas, there are two alternatives. One, you could still buy ETFs (like the Nasdaq 100) on Indian stock exchanges. But there is a catch. While buying units of ETF do check the prices as they may quote at a premium to net asset value as new units won’t be created till the limit is raised.
 
The second option is directly buy stocks listed overseas. You need to make an informed choice about which company’s shares you wish to buy and which ones to avoid. Only investors who can choose the right stocks or have an investment advisor guiding them should do that. Investors may avail of RBI’s liberalised remittance scheme to invest directly in stocks abroad. Under the LRS, resident Indians can remit up to $250,000 in a financial year towards purchase of foreign securities and funds in foreign currency. This limit is separate and does not fall under SEBI’s current limit of $7 billion for Indian mutual funds. Though investors have the choice of going direct and some may want to tap simple products such as the index ETFs overseas directly, operational issues and costs involved, and the tax compliance make it a cumbersome task for many retail investors.
 
However, retail mutual fund investors who want to cut the risk of direct investment, there may not be any other option but to wait for SEBI increase the overseas investment limit. the best option would be to just wait for mutual funds to resume their investments as and when the limit is enhanced.
 
As a rule, investors should invest only a small part of their portfolio in the overseas market. Most financial experts believe developing markets like India will offer superior returns over a long period of time.
 
The mutual fund industry is waiting for the limit to be hiked by the regulator. The RBI is expected to decide on the issue of this industry wide limit on the overseas investments.