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How restricting fresh lumpsums in international mutual funds impacts investors

The restriction is applied to fund houses on buying listed shares or securities or units of schemes overseas (other than exchange traded funds)

February 03, 2022 / 02:27 PM IST
Intro
As directed by the market watchdog SEBI and industry body AMFI, mutual funds have now stopped accepting fresh lumpsum investments in schemes dedicated to investing in overseas stocks. It seems to be a temporary move by the regulator to avoid breaching of industry-wide overseas investment limit of $7 billion. The restriction is applied to fund houses on buying listed shares or securities or units of schemes overseas (other than exchange traded funds) from February 2, 2022.
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The assets under management (AUM) of international funds offered by domestic mutual funds for Indian investors went up to Rs 39,658 crore (as of December 2021) from Rs. 3,688 crore two years ago before. Number of accounts went up six-fold. Superior returns from US indices, a weak rupee vis-à-vis the dollar and the newer investment opportunities in overseas markets made investors choose international funds. Though there can be a direct access to overseas equities, mutual funds route provides a feasible solution to Indian investors to invest in the international equities. A prolonged restriction on accepting fresh lumpsum in these funds may end up Indian investors losing such opportunities. Swarup Mohanty, Director & CEO, Mirae Asset Investment Managers (India) says, “This was in the expected lines as the limit set by RBI of $7 billion was getting exhausted. We would have to wait for further enhancement of limits and guidance from the regulators on the prospects of receiving fresh inflows”.
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Of all the global funds available to Indian investors, the US funds attracted the most inflows, on the back of a run-up in markets there. The Nasdaq 100 index gave 41 percent in 2019 and 51 percent in 2020. The Nifty 50 index delivered 13 percent 16 percent, respectively. The US-focused funds bring stocks of companies like Microsoft Corp, Alphabet Inc, Amazon.com, Facebook and NetFlix Inc. that are otherwise not available in India.
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There are 65 international funds (including in-house ETF FoF) offering you a variety of funds that invest predominantly in the US, Europe, Japan, Brazil, China, Asian and emerging markets. Theme-based international schemes focusing on agriculture, mining and real estate sectors also form a part of their offering. However, US focused funds comprised (20 funds) more than half of the AUM.
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Motilal Oswal Nasdaq 100 ETF, tracking the US technology giants and others, tops the chart. Apart from the US focused funds, past year saw increased interest among investors in the funds investing across the overseas market like PGIM India Global Equity Opp and Invesco India Global Consumer Trends FoF.
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There are 39 equity diversified funds (allocating at least 65 percent Indian equities) too have allocation to international equities with the a collective investment of Rs 20,236 crore as of Dec 31, 2021. These schemes provide investors a geographical diversification while maintain equity funds’ taxation. Parag Parikh Flexi Cap Fund has been the one allocating around 30 percent of its total assets into US equities. Its corpus allocated to international equities has been higher than that of the most of the dedicated international funds.
Though US technology backed themes are favourite products, domestic fund houses also come up with the new, niche and innovative products that are otherwise not available for Indian investors domestically. Recently, AMCs have filed drafts for regulators’ approval that are focusing on Emerging technologies, Electric Vehicles, Artificial Intelligence, Blockchain, Semiconductor, Sustainable Healthcare and S&P U.S. IPO & Spinoff stocks and so on. This will open up newer investment opportunities for the Indian investors and provide leg-up to the portfolio performance.
Though US technology backed themes are favourite products, domestic fund houses also come up with the new, niche and innovative products that are otherwise not available for Indian investors domestically. Recently, AMCs have filed drafts for regulators’ approval that are focusing on Emerging technologies, Electric Vehicles, Artificial Intelligence, Blockchain, Semiconductor, Sustainable Healthcare and S&P U.S. IPO & Spinoff stocks and so on. This will open up newer investment opportunities for the Indian investors and provide leg-up to the portfolio performance.
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International funds help Indian investors to buy stocks of companies that are otherwise not available in India. Allocation to foreign stocks also provide geographical diversification and hedge against US Dollar. Here is the list of top 10 stocks held by these international funds (based on the available data). Portfolio data as on Dec 31, 2021. Alphabet Inc., a holding company of Google, has been the most preferred stock among the US focused mutual funds. The other preferred stocks are Microsoft, Apple, Amazon.com and Facebook.
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International funds with investment in different regions are low-correlated to Indian equities thus provide diversification and stability to the portfolio. Over the last 10 years, funds that invest predominantly in the US market have recorded mouth-watering double-digit returns. China focused funds and other themes like gold mining companies too putup better performance. On the other hand, funds investing in agriculture and energy businesses and regions such as Europe, Brazil and Japan have seen a slump in their fortunes.
Dhuraivel Gunasekaran
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