A regulatory ceiling on overseas investment have cost mutual fund investors dearly, especially in the last one year. Fund houses were directed to stop taking fresh subscriptions in schemes that invest in overseas securities from February 1, 2022, as the $7 billion limit set by RBI for such investment was close to being breached. Last year, MFs were told to suspend flows into overseas ETFs as the $1 billion cap for such funds was nearly exhausted.
“The current caps are restrictive and most investors willing to take overseas exposure have lost out on the opportunity to invest in major markets such as the US and China. There is good reason to believe that if the caps are lifted, we could see pent up demand materialise in the form of additional investment in these funds,” said Nirav Karkera, Head of Research, Fisdom.
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US equities as measured by S&P 500 returned 26 per cent last year compared with gains of 8.7 per cent given by Nifty 50. The outperformance may be even more stark if one factors in the steep rupee depreciation against the dollar in the past few months.
US equities, specifically schemes investing in the tech-heavy Nasdaq Composite index, were in favour among investors before the limits kicked in and fresh investment was halted.
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Investors’ strategy
Investors may have also lost out on the opportunity to invest in China equities whose valuations became attractive last year compared to historical averages and global peers. The stimulus measures announced by the Chinese government in September had even prompted several global investors to switch to a ‘Sell India, buy China’ strategy.
“Until 6-8 months ago, some international funds were accepting money in fits and starts through SIPs. Currently, only a handful are accepting fresh money. We are not allocating any fresh client money to international equities,” said Amol Joshi, founder of PlanRupee Investment Services.
International funds manage about ₹60,000 crore. Additionally, 16 domestic funds that invest in overseas shares, with an allocation ranging from 5.1 per cent to 29.4 per cent, have a total overseas exposure of ₹20,000 crore.
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The industry has been lobbying with the regulators to relax the ceiling for many months now. “Every two months we have a pre-monetary policy consultation with the RBI governor and request a rethink on the limits,” said a senior fund official.
Global funds
He added that the international funds have effectively become a “status quo” product now for MFs as inflows had, by and large, stopped. The share of overseas investment in domestic funds has been steadily reducing as well, as the incremental flows were being directed to Indian equities.
To be sure, investors can invest directly in overseas shares subject to $250,000 per financial year under LRS.
“There will be exceptions but, for the most part, mutual funds will be able to manage overseas investment better than individual investors can. The latter may also be tempted to park their money in crypto currencies, real estate and so on where the possibility of losing money is high. What’s more, it will be easier for the government to bring back that money if it has been invested through MFs,” the fund official said.