FIIs in MFs: No immediate deluge

Though the Budget move to allow foreign individuals to invest in Indian equity mutual funds is an innovative one, it would be unrealistic to expect this to result in an immediate deluge of money into Indian mutual funds or stock markets.

Other routes too

For one, Foreign Institutional Investors (FIIs) and Non-resident Indians (NRIs), the two largest investor groups interested in Indian stocks, are already allowed to invest in Indian equity funds and yet have not made a beeline for them. There are only sporadic instances of FII investments in domestic equity funds. NRIs, according to industry estimates, account for 6-7 per cent of the equity fund assets managed by fund houses.

Two, foreign individuals who are adventurous enough to invest in emerging markets such as India already have other options to take this ‘India' exposure. They can invest through offshore India-focussed funds such as those managed by HSBC, Kotak or the Aditya Birla Group which are listed overseas. Or they can also invest in the host of passive index-mirroring Exchange Traded Funds listed in their own home markets, which track everything ranging from the Brazilian Bovespa to the Indian Nifty.

Returns, the draw

Under the circumstances, it is the extremely attractive returns (16-18 per cent a year) managed by the leading equity funds in India over the past five years, which is likely to be a draw with foreign investors. Many Indian equity funds, particularly actively managed ones, are beginning to figure among the top performers globally in the rankings of rating agencies like Morningstar.

However, even that would require Indian fund houses to make their products accessible to the investors overseas either through their parent's distribution infrastructure (which international asset managers such as Franklin Templeton, Fidelity or BNP can easily do) or through their own branch offices. Three, foreign investors will first have to clear SEBI's stringent know-your-client (KYC) norms that are in place for all mutual fund investments in India.

There are two benefits to the mutual fund industry though, if foreign individual investors do take the plunge into Indian markets. For one, being used to the notion of putting away their retirement and other long-term savings into stocks, such investors may make for a fairly stable source of long-term assets for Indian markets and may not churn their portfolios as much as local investors do. Two, given the anaemic returns that are today, the norm in most developed markets, their return expectations may not be as difficult to meet as those of Indian investors, making the task easier for fund managers.

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