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Explained: Why re-opening of international mutual funds may benefit only a few investors

Only select fund houses have opened their doors of international funds. And they may shut these if they breach their February 1, 2022 limits.

June 22, 2022 / 10:03 AM IST
Representative image.

Representative image.

Financial markets regulator Securities and Exchange Board of India (SEBI) has allowed mutual funds to accept fresh money into the schemes investing in overseas stocks. The allowance falls within the stipulated overall industry-wide limit of $7 billion. This has seen some fund houses re-opening their schemes investing overseas.

Here is all that mutual fund investors need to know:

Why have some international funds re-opened their doors?

In early February 2022, SEBI had directed fund houses to temporarily suspend investments in stocks listed overseas as the overall limit of $7 billion was getting breached. This forced schemes investing overseas to stop accepting money from investors; be it lump sum or systematic investment plans (SIPs). This upper limit still stands today; it has not been enhanced. But there is a small change.

SEBI has now allowed mutual fund schemes to resume subscriptions and make investments in overseas funds or securities, selectively. It has allowed schemes to collect fresh subscriptions, up to the headroom available without breaching the overall overseas investment limit as on February 1, 2022 at the mutual fund level.

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But if limits are not yet enhanced, how will re-opening funds help investors?

Between February and now, equity markets globally, including the US, have corrected due to a plethora of reasons like the Russia-Ukraine conflict, fears of rising interest rates on the back of rising inflation, and so on. Investors have redeemed units making fund houses sell their holdings and pay the investors.

SEBI has clarified that mutual funds can utilise this headroom available in the overseas investment limit created due to redemptions and consequent sale of overseas securities post February 1, 2022.

So, which schemes are open now?

As the regulator has allowed inflows only to the extent of existing limits, each fund house has to take a decision based on how much headroom it has, at present.

There are three types of mutual fund schemes that offer exposure to overseas stocks. First: the schemes that buy into units of exchange-traded funds (ETFs) listed overseas. These had a separate limit of $1 billion which was not breached. Hence, all such schemes will continue to accept fresh inflows.

The second type include schemes that invested in overseas stocks or units of mutual fund schemes. These schemes were not accepting money since February 1, 2022. Some fund houses have announced that they will start accepting money in such schemes.

The third type of schemes include those which invest in a mix of domestic equities and stocks listed overseas. These schemes did not stop accepting money; they have remained open through this period. But they did not buy overseas stocks in the interim period. So, if such schemes have sold international stocks in the interim period and as a result their international investing limits have been freed up, they will invest a bit of your inflows abroad.

Which fund houses are accepting money?

Leading fund houses such as ICICI Prudential, Edelweiss, Nippon India, Mirae, and PGIM have decided to accept money in their schemes that invest overseas.

Check how your fund house will accept your money. For example, Nippon India and Edelweiss Mutual Funds have allowed investments through lump sum, switch-ins, SIPs and systematic transfer plans (STPs). Fresh registrations for systematic investments are allowed.

Franklin Templeton Mutual Fund, however, has decided to only accept money through existing SIPs, STPs and transfer of income distribution-cum-capital withdrawal plans (erstwhile dividend). If you have already registered for any of these three modes of investments in the three schemes of Franklin Templeton Mutual Fund investing overseas, then the remaining instalments will start on the due dates in the schemes you have chosen. No lump sum or new registration of SIP or STP is allowed.

Mirae Mutual Fund has decided to allow Rs 2 lakh per investor (PAN level) per day per scheme in the three fund-of-funds (FOF) schemes feeding into underlying ETFs. The fund house however, is not processing existing SIPs and STPs suspended earlier nor is it allowing registration of fresh SIPs or STPs. It is also not allowing fresh creation of units in ETFs. However, units of ETFs will continue to trade on the stock exchanges.

Motilal Oswal Mutual Fund has clarified that they are not accepting fresh money in their schemes investing overseas due to lack of headroom. Motilal Oswal Mutual Fund manages the largest international fund in India– Motilal Oswal Nasdaq 100 ETF, with Rs 5,262 crore worth of assets under management (AUM) in it.

PPFAS Mutual Fund has not sold stocks listed overseas that it held in its flagship scheme – Parag Parikh Flexi Cap Fund. Hence, no incremental investments will take place overseas. The scheme continues to accept money from investors, but it will invest the incremental inflows in stocks listed on Indian exchanges.

How long will this investment window remain open?

Allowing investments in these schemes is a temporary respite. The fund houses cannot accept money beyond the threshold they hit on February 1, 2022. Hence, each fund house will keep track of the money flowing in and depending on each fund house’s threshold getting exhausted, the subscriptions may stop.

“The AMC at its discretion reserves the right to suspend the subscriptions as and when it is close to the headroom limit which was available as of February 1, 2022. A separate notice shall be issued to investors in this regard,” said the addendum issued by Edelweiss AMC.

What about redemptions?

There are no restrictions on the redemptions of units of mutual fund schemes. If you are holding on to the units of ETFs, then these can be sold on the stock exchanges.

Should you buy?

Investments overseas help you to diversify by “investing in sectors and stocks that aren’t part of Indian indices”, says Ajit Menon, CEO, PGIM Mutual Fund.

The current sell-off in the global equity markets makes a strong case for investing in equities. Lakshmi Iyer, CIO-Debt & Head-Products, Kotak Mutual Fund, says, “Investing in stocks listed overseas brings exposure to new-age technology and niche businesses which may not be available in Indian markets now. This diversification to other economies, businesses and currencies reduces portfolio risk.” The recent correction in global markets makes equities attractive for long-term investors. Staggered investments in overseas equities should be considered for long-term corpus building, she adds.

However, investing in overseas stocks may not be as easy as investing in domestic equities. Most investors may not be familiar with the opportunities and risks associated with foreign equity markets. Some part of your investments targeted for long-term goals can be routed to these schemes. Ravi Kumar TV, Founder of Bengaluru-based Gaining Ground Investment Managers, says, “Investors with a long-term view and keen on investing to fund their child’s foreign education or looking for exposure to modern technology businesses can invest through mutual fund schemes investing in US stocks.”

However, there is no clarity on how long this route will remain open. Since staggered investments in equity products work better to reduce timing risk, there is a need for a long-term solution that will facilitate Indian investments in overseas stocks through a well-regulated investment vehicle such as a mutual fund, he adds.

Investors also have to be calculative on their part while allocating money to international funds. Do not jump in blindly with whatever money you have just because there is an opportunity. Roopali Prabhu, Chief Investment Officer, Sanctum Wealth, says, “Though diversification overseas can help investors improve the risk adjusted returns of their portfolio, chasing past returns will not help. Investors have to look beyond investing in stocks and leading indices such as Nasdaq 100 and S&P 500 in the US. There can be better opportunities in China and Japan as of now. Investors need to get their investments right, and for that they need expert hand-holding.”

Be measured with your investments in these international schemes as many thematic offerings have lost more money than the diversified equity funds investing in domestic equities in the recent past. It is better to invest in what you understand or just stick to US-based diversified index funds and be content with market returns over the long term.
Nikhil Walavalkar
first published: Jun 22, 2022 08:59 am
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