Picture this absurdity: You’re standing at a crossroads where one path leads through a well-lit, regulated street with clear signposts, while the other meanders through uncharted territory with minimal oversight.
Conventional wisdom would suggest taking the first route. Yet when it comes to overseas investments, Indian regulators have made the safer, more regulated path artificially narrow while leaving the riskier direct route wide open.
The Reserve Bank of India (RBI) has capped the mutual fund industry’s overseas investments at a mere $7 billion. This limit has remained unchanged for over 15 years, despite India’s growing economy and foreign exchange reserves. Meanwhile, individual investors can directly remit up to $250,000 annually to buy foreign stocks through overseas brokers or invest in foreign mutual funds.
This creates a peculiar situation where an individual Indian can open an account with an American brokerage, buy shares, or invest in foreign mutual funds with minimal regulatory oversight from India. However, the same investor cannot access similar opportunities through an Indian mutual fund house that operates under stringent domestic regulations, maintains transparency requirements, and provides the safety net of Indian legal recourse.
The irony becomes starker when you consider the practical implications. Since February 2022, the Securities and Exchange Board of India (Sebi) has repeatedly halted fresh investments in overseas mutual fund schemes as the industry approached its antiquated limits.
Arbitrary curbs
Indian investors seeking global diversification have been forced to either wait indefinitely or venture into direct overseas investing, which involves complex compliance requirements, currency conversion costs, and foreign tax implications they’re ill-equipped to handle.
Why does this matter? As I’ve argued for years in my columns, geographic diversification isn’t merely useful for Indian investors—it’s essential. Our economy, robust as it may be, cannot insulate portfolios from all global economic shifts. When the domestic market stumbles, having exposure to different economic cycles elsewhere provides crucial balance. This isn’t speculation; it’s prudent risk management that wealthy investors worldwide have practised for decades.
Yet our regulatory framework seems designed to discourage exactly this prudence. The mutual fund route, which should be the preferred avenue for retail investors, faces arbitrary industry-wide caps that make little economic sense. Why should the combined investment appetite of all Indian mutual funds be artificially constrained while individual limits remain generous?
If the concern is capital outflows, then individual limits make far more sense than industry-wide curbs that penalize professional management and regulatory oversight. The system actively pushes investors away from professional management toward do-it-yourself (DIY) solutions they may not be equipped to handle.
The situation becomes more absurd when you realize that the individual LRS (liberalized remittance scheme) limit of $250,000 per person means a family of four can remit up to $1 million dollars annually. A mere 7,000 families can equal the entire Indian mutual fund industry! There’s no shortage of capital available for overseas investment—merely an artificial constraint on how it can be professionally managed.
Old mindset
The regulatory mindset appears to be rooted in an outdated view of capital controls rather than modern portfolio theory. The RBI’s reluctance to raise limits seems to be linked to concerns about rupee depreciation, yet the same central bank permits equivalent outflows through individual remittances. This inconsistency suggests policy confusion rather than a coherent strategy.
Indian investors need don’t arbitrary industry caps but sensible individual limits that allow professional management to flourish. If the concern is excessive outflows, apply the same $250,000 annual limit to mutual fund investments per individual rather than constraining the entire industry. This would preserve individual choice while maintaining regulatory oversight and professional management benefits.
The current framework inadvertently promotes financial literacy gaps by pushing investors toward complex direct investing rather than simplified mutual fund structures. It’s rather like banning organized tours while encouraging independent travel to unfamiliar destinations—possible for some, but hardly optimal public policy.
Until this regulatory paradox is resolved, Indian investors seeking global diversification will continue facing an artificial choice between professional management with uncertain availability and direct investing with significant complexity. The irony is that the safer, more regulated path has been made deliberately more difficult to access than its riskier alternative.
Views are personal.
Dhirendra Kumar is the founder and chief executive of the independent advisory firm Value Research.