The Hindu Business Line : Mutual funds are free to spread their wings

Feel that stock prices in the Indian market have run up too much? You may soon get an opportunity to diversify by buying stocks from the Chinese, Taiwanese, or Japanese stock markets through the mutual fund route.

The Budget has just liberalised the norms for overseas investments by Indian mutual funds, opening up a new window for investors looking to deploy money in stocks listed overseas.

Norms too restrictive

Under existing norms, the mutual fund industry can make investments of up to $1 billion in the stocks of companies listed abroad. But more than this ceiling, it is the rules on where these investments should go that have tied the hands of fund managers.

Under these norms, fund houses can only invest in foreign companies that directly hold at least 10 per cent stake in a listed Indian company. As a result, Indian fund houses looking to make overseas investments have had to choose from a limited universe of just 30-40 MNCs with listed Indian arms.

Not surprisingly, only one fund - the Principal Global Opportunities Fund - has been rolled out since the norms on overseas investments were notified.

With so many fetters on its investments, this fund too has lagged behind the category average for diversified equity funds by a big margin.

A freer hand

The Budget has made overseas investments by Indian funds a much more workable proposition. To start with, the overall ceiling for overseas investments by funds has been expanded to a respectable $2 billion (about Rs 9,000 crore).

More importantly, the clause that requires a foreign company to hold a "reciprocal" 10 per cent stake in an Indian company has been done away with.

For fund houses that prefer not to sift through individual stocks listed overseas, a separate $1-billion limit has been carved out for exchange traded funds (ETFs) listed overseas. ETFs passively track a stock market index or a sector and are listed on the exchanges.

What this means:

The relaxation in investment norms throws the field wide open for fund houses to launch a range of products that invest outside India.

These could be targeted at specific overseas markets (say, a fund dedicated to American or Taiwanese stocks), a class of markets (an emerging markets fund for Indian investors), or a combination of these (a diversified fund that invests in the entire universe of stocks listed outside India).

The launch of such products may expand investing opportunities for Indian savers looking to diversify.

Many institutional investors have, in recent months, commented that the Indian markets appear richly valued in comparison to other emerging markets. If you subscribe to this view, you may like to reduce your risks by diversifying into those markets.

There may also be stock-specific opportunities where the gap between Indian valuations and those overseas are wide. The Singapore Airlines stock may, for instance, be an attractive alternative to Jet Airways. Fund houses can now take advantage of these.

Investing in stocks overseas may help investors capitalise on investment themes that are not adequately represented in the Indian listed universe. Oil marketing companies here, for instance, are not a good proxy for crude oil prices because of the artificial restraints on their pricing.

Funds that invest in ETFs listed overseas would be a passive means to taking exposure to markets about which fund houses have a positive view, without calling individual stocks correctly.

Fund houses with a foreign institution or foreign bank as a stakeholder would be better placed to source research inputs about the overseas markets for their mutual fund operations.