International funds offer Indian investors exposure to companies outside India, providing diversification, access to global markets, and exposure to sectors not readily available domestically. However, recent restrictions imposed by SEBI on foreign investments in mutual funds have impacted the availability of international funds for Indian investors. Let's explore the impact of these restrictions.
Investing in international funds provides Indian investors with several advantages. Firstly, it allows for geographic diversification, spreading investments across different countries and reducing reliance on a single economy. This diversification helps mitigate risk and provides a more balanced portfolio. Additionally, international funds grant access to new investment opportunities unavailable in the Indian market.
In some cases, international funds offer the potential for higher returns compared to Indian funds due to the diversity and growth opportunities in developed countries. Lastly, global funds are managed by experienced professionals. Their expertise helps investors make informed decisions, reducing the risk of individual stock selection.
Foreign investments in both Indian and international mutual funds were booming post-pandemic. In June 2021, regulatory body SEBI, mandated mutual fund houses to collectively invest a maximum of USD 7 billion in foreign stocks to prevent disruption. Each mutual fund house is allowed to have a foreign investment exposure of up to USD 1 billion. Schemes that invest in ETFs listed overseas have a threshold of USD 1 billion. These amounts are included under the overall upper threshold.
In early 2022, this limit was about to be breached. Hence no longer having access to a micro-scale, SEBI asked all mutual fund houses to suspend all outflow of foreign investment. Fund managers that couldn't divert to Indian securities had to choose between waiting for overseas investments to reopen or losing their recognition as international funds.
*All existing SIPs were halted unless their fund management could switch to Indian assets.
*Retail investors in international markets like China were low.
*The hedge against Indian market risk and the potential for big earnings was no longer an option.
*On a macro scale, the lack of access to profitable funds reduced business capital generation.
*It could have slowed the growth of SMEs and startups, hindering the Indian economy.
In June 2022, SEBI amended its restrictions on foreign investments. Many mutual fund houses have announced that they will start accepting investments into international funds. This decision by SEBI is conditional on the rule that mutual fund houses do not breach the overall limit of ₹7 billion USD. Note: The directive could be temporary, so investors should be cautious about international funds.
The recent amendment by SEBI to allow Indian investors to invest in international funds, albeit with certain conditions, provides renewed opportunities for diversification and exposure to global industries. The reopening of international funds can contribute to the growth of the Indian economy by facilitating capital generation and supporting the development of SMEs and startups.
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According to SEBI, the overall industry limit for Mutual Funds from India is USD 7 billion.
There is no indication that SEBI will increase the foreign investment limit for international mutual funds. As of now, the limit remains the same as that of February 1, 2022.
As per the regulatory body, Liberalized Revenue Scheme (LRS), Indian residents can invest up to $250,000 USD (around ₹2 crore) in foreign investments each year without any special permissions.
