The Association of Mutual Funds in India, the industry body, has decided to cap individual mutual funds overseas investment limit as of February 1. Mutual funds nearing the overseas investment limit set by AMFI will restrict inflows through lump sum investments before capping monthly systematic investment plan.

Asset Management Companies (AMCs) shall not make any incremental investments in overseas funds or securities beyond what is existing as of February 1, at the respective mutual fund level, said an AMFI advisory. In other words, it added that the total utilisation by each AMCs of the overseas investment limit shall be capped at the amount as of February 1-end in order to ensure compliance with the SEBI direction, it added.

"AMC shall uniformly implement the direction from February 2, in order to give sufficient time to all stakeholders such as AMCs, RTAs, Platforms (stock exchanges, MFU, etc.), Intermediaries (MFD, RIA, etc.) and Payment aggregators to make necessary changes to systems and processes," the AMFI advisory said.

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Earlier, the market regulator SEBI had advised DSP Global Innovation Fund of Fund to limit its overseas investment to ETFs and wait till the Reserve Bank of India (RBI) enhances the overall $7 billion limit set for mutual funds before investing in actively managed overseas funds.

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Incidentally, ETFs have a separate industry level cap of $1 billion. Motilal Oswal Mutual Fund also stopped accepting lump-sum and switch-in investments in three of its international schemes — Motilal Oswal S&P500 Index, MSCI EAFE Top 100 Select Index and Nasdaq 100 Fund of Fund.

On June 1, SEBI had also increased the foreign investment limit for each mutual fund house to $1 billion from $600 million. The overall limit for the mutual fund industry was set at $7 billion. With the sharp inflow in overseas investment, mutual funds are hitting their individual cap and have been knocking at the doorsteps of SEBI to enhance the limit.

Increased inflow

Thanks to talks of Indian markets being overvalued, investors are pouring money into overseas focused mutual fund schemes as the once niche product for well-informed HNIs is being offered to retail investors with risk appetite as part of their portfolio diversification.

Inflow into global Fund of Funds increased multifold to ₹1.86-lakh crore last year against ₹80,862 crore in 2020. In fact, the increase is significantly high compared to inflow of ₹8,424 crore in 2019 and ₹2,661 crore registered in 2018.

Interestingly, investment in the US-focussed funds garnered the maximum investment of ₹89,642 crore against ₹45,053 crore recorded in 2020 while China and other emerging markets followed with mop-up of ₹15,280 crore (₹4,946 crore) and ₹3,005 crore (₹1,466 crore).

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