Capital market regulator SEBI has directed the Association of Mutual Funds to stop inflows into overseas exchange traded funds from April 1 as it is approaching the overall limit of $1 billion set by the RBI.

In January 2022, SEBI stopped mutual fund houses from taking fresh subscriptions in schemes investing in overseas stocks. After the recent fall in overseas market, it eased with the strict overall industry cap of $7 billion.

The mutual fund industry has overseas schemes which invest directly in overseas market and the other avenue is through overseas exchange-traded funds (ETFs), which subscribes into schemes managed by foreign fund houses. Currently, there are 77 mutual fund schemes in India that invest overseas.

Both AMFI and individual fund houses have made representation to RBI and SEBI to increase the overseas investment limits to allow investors diversify their investment and take advantage of rally in developed markets.

The current overseas investment limit for the MF industry was set in 2007-08 when India’s forex reserves was about $300 billion and has not been revised since, despite Indian economy becoming vibrant with forex reserves of $600 billion, said the CEO of a fund house.

Valuation

SEBI has also directed mutual funds to value the utilisation of overseas investment limits based on the cost of acquisition and not as per current market valuation of the investment.

Mutual funds have been accepting investment in overseas schemes based on the headroom available within the individual fund house cap.

Last month, one of the largest overseas-focused fund house Nippon India Mutual Fund stopped subscription into four of its overseas schemes including US Equity Opportunities, Japan Equity, Taiwan Equity and Nippon India ETF Hang Seng BeES. However, it accepts the existing systematic investment plans (SIPs) and systematic transfer plans (STPs) registered in these schemes will continue, said the fund house.

With the looming uncertainty on fresh investments, inflows into overseas fund have remained almost stagnant through out this fiscal. In fact, the net outflow from 50 fund of funds investing overseas has increased to ₹239 crore in February against ₹115 crore logged in April. The overall assets under management has increased 10 per cent in 11 months of this fiscal to ₹24,932 crore from ₹22,639 crore logged in last April.

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