Capital market regulator SEBI will soon allow mutual fund schemes to invest in overseas MFs and Unit Trusts that invest certain portion of their assets in the Indian securities.

In order to diversify the portfolio and as part of overseas fund of funds schemes, the Indian mutual funds often invest in overseas securities, including units of overseas MF/UTs, exchange traded funds and index funds. However, ambiguity remains regarding investments in such overseas funds that invest certain portion of their funds in Indian securities. This has deterred MFs from investing in those overseas funds that invest in a basket of countries, including India.

Investment cap

Currently, SEBI has banned all overseas investment by MF schemes as they have breached $7-billion investment limit set by RBI. MFs have also exhausted an additional $1-billion cap for exchange traded funds (ETFs).

In a consultation paper issued on Friday, SEBI said considering strong economic growth prospects of India, Indian securities offer an attractive investment opportunity for foreign funds. Accordingly, various international indices, ETFs, MFs, UTs allocate a portion of their assets to Indian securities.

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For instance, as of April 30, the MSCI Emerging Markets Index has 18.08 per cent weightage to Indian securities. Similarly, JP Morgan’s ‘Emerging Markets Opportunities Fund’ holds about 15 per cent in Indian investments.

Subsequently, there appears to be merit in considering domestic MFs to invest in overseas funds that have limited exposure to Indian securities, subject to proper checks and balances, said SEBI.

Investors can send in their views on the consultation paper by June 7, it said.


The consultation paper has proposed to allow MF scheme to invest in such overseas MFs that have less than 20 per cent exposure to Indian securities.

In case of breach of investment limit, the scheme will enter into an observance period of six months to correct the portfolio and no fresh investment or subscription will be allowed during this period.

With proper disclosure, SEBI has suggested contribution of investors of the overseas MF schemes should be pooled into a single investment vehicle and all investors should receive a share of returns from the fund in proportion to their contribution.

Mutual funds should appoint an independent investment manager/fund manager who is actively involved in making all investment decisions for the fund, it said.