Overseas mutual funds are again open for investments; what should be your strategy?

As of now there are 70 schemes in India which are dedicated for investing in various overseas geographies and instruments.

After nearly a year of regulatory limitations, most Indian equity funds investing in overseas markets are again accepting funds from domestic investors.

Motilal Oswal Asset Management Company (AMC) recently announced that from January 1, it will accept fresh subscriptions in five of its international funds via lump-sum payments and options such as systematic investment plans (SIPs) and systematic transfer plans (STPs), etc, without any restrictions.

The five funds are S&P 500 Index Fund, Nasdaq 100 ETF, Nasdaq 100 Fund of Fund, MSCI EAFE Top 100 Select Index Fund and Nasdaq Q 50 ETF.

Some of these funds were earlier accepting investments too, but with certain restrictions.

Franklin India Mutual Fund last month announced that fresh registrations under SIP and STP in Asian Equity Fund, Feeder Franklin US Opportunities Fund and Feeder Templeton European Opportunities Fund were being reactivated.

The fund house is not accepting lump-sum investments in these schemes.

Regulatory restrictions

In January, the Securities and Exchange Board of India (SEBI) had asked mutual funds investing in overseas securities to stop further such investments to avoid breaching industrywide limits imposed by the Reserve Bank of India.

There’s an overall industry-level limit of $7 billion for mutual funds to invest in overseas securities and funds and a separate limit of $1 billion for investing in overseas exchange-traded funds (ETFs).

Industry body the Association of Mutual Funds in India (AMFI) in June had notified that mutual fund schemes may resume subscriptions and make investments in overseas funds or securities up to the headroom available without breaching the investment limits.

In other words, the headroom refers to the vacuum of stocks created when the fund sells its shares. Even if the corpus of the fund went down, it was not allowed to take in fresh subscriptions and could take in fresh money to the extent of stock sold.

As of now, there are 70 schemes in India dedicated to investing in various overseas geographies and instruments.

What’s open, what’s not

Experts say because of some redemptions in overseas investments fuelled by the weakness in global markets, funds now have a bit of leeway to invite fresh investments.

All international-oriented offerings of Nippon India Mutual Fund such as US Equity Opportunities, Japan Equity, Taiwan Equity, Multi Asset Allocation Fund and Hang Seng BeES ETF are available for subscription. There is no restriction with respect to the investment mode (lump-sum, SIP or STP) and subscriptions.

Another major fund house, ICICI Prudential AMC is accepting subscriptions across its five international offerings with no restrictions.

To be sure, while most funds are open, some fund houses have certain restrictions on investments.

PGIM India Mutual Fund has three global schemes—Global Equity Opportunities Fund, Emerging Markets Equity Fund and Global Select Real Estate Securities Fund of Fund (FoF). The AMC is allowing subscription or switch-in for a maximum amount of Rs 2 lakh per day per permanent account number (PAN), while no fresh SIPs or STPs can be registered in any of these three funds.

Meanwhile, SBI Mutual Fund, which has one overseas scheme (International Access US Equity FoF), isn’t allowing lump-sum and fresh SIPs but existing SIPs and STPs continuing as is.

At Kotak Mahindra AMC, barring Global Emerging Market Fund, all other five funds are open for subscriptions with no restrictions.

DSP Mutual Fund, which has seven international schemes such as World Gold Fund and US Flexible Equity Fund, is accepting funds in all its overseas funds.

Speciality funds

Over the past five years a large number of Indian investors looking at geographical diversification have focused on US equities as a key market. But in the last couple of years these investors have diversified their overseas portfolio to countries such as China and Taiwan and even to thematic funds.

One such fund, Edelweiss AMC’s Greater China Equity Off-shore Fund, which invests in equities from China, Hong Kong and Taiwan, is open for all investments.

The Edelweiss’ Greater China fund is the biggest fund focusing on the region with assets under management (AUM) of around Rs 1,612 crore.

As per the fund house, valuations are working in favour of the China markets.

On the other hand, Axis Mutual Fund’s Greater China Equity FoF is not allowing additional inflows currently but the fund house’s Global Innovation FoF and Global Equity Alpha FoF are accepting fresh investments.

Axis Nasdaq 100 FoF too is open for international investments.

Mirae Asset Mutual Fund’s Global Electric & Autonomous Vehicles ETFs FoF and Global X Artificial Intelligence & Technology ETF FoF - Direct Plan are open for investments with no restrictions.

What should investors do?

Since the start of the year, US equities have taken a beating, led by the crash in technology shares. The tech-heavy Nasdaq Composite index is down over 30 percent on a year-to-date basis, while the broader S&P 500 is down 20 percent.

However, financial advisors suggest that global diversification is still a must for investors with meaningful portfolios. Global diversification helps investors avoid home bias and currency depreciation risks, they said.

“Looking at it from a valuation or an opportunity point of view, I feel themes like technology—which can be played via Nasdaq—are structural themes, and one should use the current correction to actually invest in these. This is actually a very good opportunity for investors who have a long-term mindset,” said Tarun Birani, founder and director, TBNG Capital Advisers.

Rushabh Desai, founder, Rupee With Rushabh Investment Services, suggests that with the US economy expecting some pain in the first half of 2023, investors can put in 50 percent of their funds meant for global diversification right now and stagger the rest over three-four months.

Financial advisors are also suggesting that one can look at China for global diversification. The Chinese economy is going through a troubled phase right now because of the Covid-19 situation, regulatory uncertainty, property crises and low global exports.

“Valuations and prices are dirt cheap at this point of time. There can be further pain. The China market had bottomed out somewhere around 14,000-15,000 level (Hang Seng index). Currently, their market is around the 19,000 level. In the worst-case scenario, the market can probably go back to its original lows, which happened around a month or two back. Even if someone wants to invest a lump sum at this point of time, I don't have any issues. But this has to be taken as a tactical bet, and in one’s satellite portfolio,” said Desai.