Holding the foreign hand - FIIs in mutual funds

By: Pravin Palande/Forbes India

Indian mutual funds can now raise money from foreign retail investors. It is just the boost that the troubled sector needed

The floodgates might just have opened for the Indian mutual fund industry. Indian markets have always been considered to be very attractive for investors in developed markets, but mutual funds in India were never allowed to tap retail investors from abroad. Hence, mutual funds used the Mauritius route to attract international investors into their portfolio management schemes (PMS) or offshore funds. This has often been considered cumbersome and the target customer has always been institutional investors. The latest Budget proposal, however, might just change all this.

Infographic: Hemal Sheth

The global mutual fund market is around USD 20 trillion, with emerging markets claiming an increasing share of the pie. The Indian mutual fund accounts for only USD 150 billion, but if the economy grows at even around 8% and mutual funds are allowed to sell their products directly to foreign retail investors, the size of the market can double in a few years.

There already exists a large market for offshore India-focussed funds with more than 150 such schemes in operation. This means foreign nationals want ways to punt on Indian equities. Given that the global wealth management market is growing at a rate of around 10% and the Indian market is expected to grow at twice the rate, the Indian market should easily touch USD 400 billion in the next five years. If Indian mutual funds find a market internationally, then this figure can go up further.

However, without clarity on issues such as taxation and