Looking beyond restrictions on MFs investing abroad

In early 2022, SEBI placed restrictions on investments in overseas securities by mutual funds (MFs), which has impacted Indian investors who look for international diversification to their portfolio.

Reasons for restrictions  

Over the past few years, awareness of long-term benefits of global diversification to one’s portfolio led Indian investors to increase their exposure to equities of foreign countries like the US. MFs have been the investors’ favourite route to global investing.

Way back in 2008, SEBI and RBI set an industry-wide limit of $7 billion on investments in foreign funds and securities for the MF industry. The $7-billion limit itself was raised over time. However, this didn’t seem enough, given the rising investor appetite. Hence, earlier this year, SEBI advised MFs investing in foreign securities to stop further investments to avoid the breach of the limit, with effect from February 2, 2022.

Following SEBI’s directive, AMFI asked the fund houses to stop accepting fresh investments for schemes that invests in international securities. Apart from the industry-wide limit of $7 billion, $1-billion limit was also set at the fund house level; but even if such limit was not breached by a particular fund house, they cannot actively invest in foreign securities due to industry-wide limit being exhausted.

Though limit has been placed on fresh investments, fund houses are allowed to sell holdings from a foreign stock existing in the portfolio and buy another stock. Hence, they are allowed to shuffle across their foreign investments, but aren’t allowed to remit any fresh money. 

What can investors do

While the US market correction provides good entry points, as an investor, currently, you will not be able to make fresh lumpsum/SIP/STP investments in the active international MFs and their FoF (fund of funds). However,  there is a separate cap of $1 billion on ETF (exchange traded fund) schemes which invests in overseas securities and ETF FoFs. There is still certain cushion left here and you can invest through this route.

ETFs are traded on the exchanges like stocks and are passively managed as they just replicate a particular index. ETFs generally have lower expense ratio compared to an actively-managed fund, but investors need to know that ETFs might be trading in the market at a premium to NAV (Net Asset Value). Let us look at some schemes available for investors to invest through the ETF/FOF route.

Motilal Oswal NASDAQ 100 ETF replicates the US Index NASDAQ 100. Other funds investing in US equities such as Invesco EQQQ NASDAQ-100 ETF/ FoF, Kotak Nasdaq 100 ETF/ FoF, Mirae Asset S&P 500 Top 50 ETF etc. are also open.

ICICI Prudential Passive Multi Asset FoF is another fund that is open for subscription. This FoF invests in multiple asset classes. It has a universe of 30 global ETFs, out of which it invests in select ETFs according to market conditions of specific countries.

How it works

ETFs are traded on the exchanges like stocks and are passively managed as they just replicate a particular index

DSP Global Innovation FoF is another fund that invests in global active and passive funds and ETFs, which, in turn, invest in technology and innovation companies. Currently, owing to restrictions, it mainly invests in two ETFs such as iShares NASDAQ 100 UCITS ETF and iShares Semiconductor ETF in equal proportion.

Nippon India ETF Hang Seng BeES, which replicates Hang Seng Index, and Mirae Hang Seng Tech ETF, which replicates Hang Seng Tech Total Return Index, are also open for investments.

While investing in FoFs, investors need to know that FoFs generally tend to have higher expense ratio because of the additional layer involved.

Alternative option

To sidestep the restrictions on MF investing abroad, direct investing in global stocks is an option.

Indian brokerage houses such as ICICI Direct, Kotak Securities, Axis Securities etc have tie-ups with certain brokers/platforms to invest in foreign stocks. One can also directly go through platforms such as Vested Finance and Stockal.

Another way is to open an overseas trading account directly with US brokers such as Interactive Brokers, Charles Schwab and Ameritrade, among others. To open an account with US brokers, one need not have a US-based mailing address or citizenship.

Remember that for directly investing in foreign stocks, investorsneed to understand the global markets deeply and needs to do certain amount of research.

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