The Securities and Exchange Board of India (or SEBI) has permitted fund houses to increase the value of investments they make per mutual fund via overseas exchange-traded funds. This means that fund houses are now capable of investing USD 300 million per mutual fund, which exceeds the current limit of USD 200 million. The prevailing industry cap, however, remains to be USD 1 billion,
Earlier this week, SEBI chose to broaden the overseas investment limit applicable to individual mutual fund houses. This means that the amount rose from its present value of USD 600 million to USD 1 billion. The industry-wide limit for investments made overseas, however, remains unaltered and continues to amount to USD 7 billion.
Why Did This Happen?
The Securities and Exchange Board of India chose to make these alterations owing to the fact that several fund houses have in recent times approached market regulators with requests to increase the pre-existing limit imposed. This was primarily owed to the fact that Indian investors have increased their desire to expand their portfolio and seek diversification in the form of global investments.
By investing in global markets, investors can take advantage of disruptive growth via various themes currently in place which have presently not been made available on the markets listed in the country. By virtue of investing in global markets, therefore, investment portfolios can be significantly diversified such that they have the capability of enhancing their returns bearing in mind the risk adjustments they must make for the same.
Owing to the fact that the interest in investing overseas has risen tremendously, some assessment management companies came close to reaching the previously imposed foreign investment limit which amounted to USD 600 million.
As of April, this year, when looking at the fund of funds (or FOF) category, management held average net assets amounting to INR 13,441 Crores as per data mentioned provided by the Association of Mutual Funds in India (or AMFI). This value does not take into account funds that ordinarily mainly purchase local stocks and only invest a portion of their corpus in international investments.
Fund of funds are a form of mutual funds that takes it upon itself to invest in schemes similar to itself. Fund managers are responsible for holding onto the portfolios of other mutual funds as opposed to investing in stocks or debt instruments. As of January 2021, approximately six fund of funds have been brought into existence by varied fund houses.
Moves that Brought This Up
In November last year, the Securities and Exchange Board of India increased the foreign investment limit applicable for each fund house to USD 600 million, doubling its previous limit which amounted to USD 300 million. At the time, exchange-traded funds witnessed an increase in the limit imposed per fund which quadrupled and rose from USD 50 million to USD 200 million.
In May this year, keeping in mind the rising interests that Indian investors displayed in foreign markets, market regulators decided to increase the overseas investment limit applicable to alternative investment funds (or AIFs) and venture capital funds (or VCFs). This saw the previously existing limit of USD 750 million doubling to USD 1500 million.
The trend to invest in overseas markets holds particularly true for those in the United States as investors hope to benefit from the runaway bull market which is presently dominating stocks pertaining to technology.
Several mutual funds have previously brought out varied and new fund offers that allow investors the opportunity to invest in foreign markets without being weighed down by having to participate in them directly.
Raised limit impositions enacted by the SEBI are in response to varied requests made out to market regulators to increase previously existing limits. Investors hope to profit from trends prevailing in foreign markets and this move will allow them to do so with greater ease and may perhaps garner greater returns.