SEBI restricts foreign investment by MFs; what should investors do

Mint reported on sunday That the market regulator has advised mutual funds to stop further investment in foreign stocks to avoid breaching industry-wide foreign limits. Even the Association of Mutual Funds in India (Amfi) has decided to cap the individual mutual fund foreign investment limit till February 1.

Earlier, PPFAS Mutual Fund stopped accepting investments in PPFAS FlexiCap Fund, which invests up to 35% of its total corpus in foreign equities, mainly stocks of US companies. Even DSP Investment Managers has reduced the number of underlying funds in their DSP Global Innovation Fund of Funds to exchange-traded funds (ETFs).

The regulator has specified an industry-level aggregate limit of $7 billion for mutual funds to invest in foreign securities and funds, and a separate limit of $1 billion for investments in foreign ETFs.

While the range of ETFs is still a while away, other international strategies have seen healthy inflows and the $7 billion limit is likely to be exhausted soon.

Experts believe that this restriction is a big downside for investors. “We are seeing volatility in the markets right now, be it China or the US. This is the right time to start investing in segments with reasonable or low valuations, especially lump sums. When the US Federal Reserve begins to raise rates and if the market does indeed fall, with sanctions in place, investors will not have the opportunity to invest during the downtrend. “This is a lost opportunity,” said Rishabh Desai, founder of Rupee with Rush Investment Services.

Industry experts are of the opinion that SEBI and Reserve Bank of India will soon increase the foreign investment limit across all fund houses as the current $7 billion limit represents a drop in the bucket.

“For example, today, the global market capitalization is close to $93 trillion and India represents 3% of that market cap. In addition, India has seen record foreign asset inflows and growth in foreign reserves,” said Vaibhav Porwal, co- Founder, Deserve, a money-tech firm said.

Meanwhile, investors looking for alternative ways to invest in foreign securities can take advantage of RBI’s liberalized remittance scheme, according to Porwal. Under the LRS, resident Indians can remit up to $250,000 in a financial year for the purchase of foreign securities and funds in foreign currency.

This limit is different and does not come under SEBI’s current $7 billion limit for Indian mutual funds.

However, for retail mutual fund investors who wish to cut down on direct investment exposure, they may have no other option but to wait for SEBI to raise the foreign investment limit.

“If one is looking for global investment, I don’t think they should settle with investing in domestic funds because globally there is less correlation between India and US, for example. So, if one is looking for global investment So I think they should wait and not jump into any domestic fund at this point of time,” Desai said.