Mutual funds investing in International Funds has stopped - Here is why

You would have heard the news that some mutual funds have stopped taking new investments for some of their schemes. These are the schemes that were investing in international funds. Let us look at what has changed and what should investors do:

What is the rule?

• The Reserve Bank of India (RBI) has set a higher limit on the investment from India in international funds.
• Hence, the Securities and Exchange Board of India (SEBI) came up with guidelines for mutual fund industry players to meet the limit. The aggregate industry-level limit for investing in overseas securities and mutual funds is $7 billion, which is $1 billion for each fund house.
• For investments in overseas ETFs, the amount is capped at US$300 million per AMC and US$1 billion for the industry.

What has changed?

• Overseas investing has grown in popularity in recent years. Investors are gradually starting to understand the importance of geographical diversification in their portfolios and investing in international funds.
• The limit mentioned above will soon get exhausted - the overall investment is close to the limit. Hence, on February 2, the schemes investing in overseas securities and mutual funds had to stop accepting flows from investors.
• It is essential to mention - the existing investment will continue in these schemes. For example, if you have a SIP in Motilal Oswal mutual funds that invest in international funds, your SIP will continue. However, you cannot increase your monthly investment amount. So if your SIP was Rs 5,000, the maximum you can invest in the fund is Rs 5,000. 
• If your friend had planned to start the new SIP in the same fund, he cannot do it now.
• MF schemes that invest in ETFs listed overseas can continue since they have an alternate limit.

Will the limit get revised?

• It is to be noted that the $7 billion limit was set in April of 2008 when the Assets Under Management of the Mutual Funds in India were around Rs 5 lakh crore and India’s foreign exchange reserves were around $309 billion. 
• Today AUM of the mutual fund industry has grown to a whopping Rs 37 lakh crore and $ 634 billion in forex reserves. Hence, the conditions are very conducive for RBI to increase the limits.
• SEBI has revised the rules and changed the limits regarding overseas investing multiple times in the past. Experts believe there is no reason it will not increase it again.
• Experts believe the limit will be increased in the coming weeks. The limit can be doubled from the current levels.
• To make sure such a situation does not come again in the future, experts are suggesting that regulators can later think of creating a dynamic model so that the limits are raised as and when needed.

What should investors do now?

If you were planning to invest in US Equities, you can do so at the INDmoney at zero cost. Click on this link to know more.. In case you’re looking to invest in US Stocks through Indian mutual funds, you can wait for the limits to be increased.