International mutual funds mess: Veteran financial advisor Vishal Dhawan says investors can look at options

Mutual fund (MF) investors looking for global diversification are suddenly in a spot of bother, as schemes investing in overseas stock markets have been forced to suspend flows.

The reason: the $7 billion limit for investing in overseas stocks and mutual funds is close to getting exhausted. This limit was set by market regulator Securities and Exchange Board of India (SEBI), in consultation with the Reserve Bank of India (RBI).

Different mutual funds are dealing with this issue in varied ways. While some schemes are only stopping fresh flows at present, others have stopped both fresh flows as well as flows from already existing systematic investment plans (SIPs) and systematic transfer plans (STPs). Mirae MF is one such fund house that has stopped flows from existing SIPs, as well as fresh flows, to its international schemes.

Parag Parikh Flexicap Fund is dealing with the issue in its own way. As a diversified equity fund that invests about 65 percent to domestic stock markets and about 28 percent in international stocks (balance held in cash), it is funnelling all the flows coming through existing SIPs into domestic stocks. At the same time, fresh flows have been suspended.

DSP Global Innovation Fund of Fund will invest in listed exchange traded funds (ETFs) overseas for now. This is because the regulatory limit of $1 billion for investing in ETFs listed abroad still remains open.

In an interaction with Moneycontrol’s Jash Kriplani, Vishal Dhawan, founder and chief financial planner of Plan Ahead Wealth Advisors, which manages advisory assets for 300 families, says the situation should get resolved quickly. But if that doesn't happen, then investors should look for other alternatives. Edited excerpts:

It is a little bit of a setback, considering that investors have only started allocating money to international investments meaningfully in the last year or two. So, diversified mutual funds which continue to accept flows are going to allocate money to domestic stocks. However, if this is just a temporary event and most of the conversations around this seem to indicate that, we don't think this is meaningful enough to change your investment strategy.

This could happen. Every fund manager will be looking at their portfolio mix very carefully. But, keep in mind that there is no minimum allocation these schemes need to make to international markets. So, such a scheme may somewhat reduce international exposure for the time being because of the limits. For example, from 25-30 percent, the exposure can go down to 22-23 percent.

However, there is still no need to change investment strategy as the situation should get resolved soon.

Yes, the good thing is that lump-sum investments have already been stopped into these funds, as well as fresh SIPs. So, effectively only flows through registered SIPs or STPs will be allowed to come in, which is still a fairly controlled pool of capital, considering the size of these funds.

It is something investors should definitely think about, as long as they can handle the tax complexity that comes with holding assets directly overseas and managing the whole process of using the liberalized remittance scheme to transfer money and report these assets correctly in your tax returns, etc. So, if you want to build your global portfolio through staggered investments via SIPs, then it is not easy to do so through non-mutual fund investment vehicles. But if you are investing with large sums of money and want to make lump-sum investments, the alternative route can definitely be looked at. So, if this situation isn’t  resolved in four weeks or so, then investors must start evaluating other options to build a globally diversified portfolio.

Yes, we need a long-term solution. In the past, it has never really caused any disruption. This is the first time that I think, flows have to be stopped. So, this has been disruptive both for the investor as well as for the entire industry. Investors now understand the importance of investing internationally. So, a dynamic model built on either the total AUM of the industry, or the total equity of the industry, could be one way to go about. Or, AMFI can come up with some sort of estimation that indicates say in next two years, this is the potential flows we can visualise in international schemes. This can be done every two years, and SEBI and RBI can set the limits on overseas investing accordingly.