What Are New Limits For International Mutual Funds To Be Redemption-Based

New lump sum investments in mutual fund schemes that concentrate on investing in foreign companies are subject to limitations imposed by the Securities and Exchange Board of India (SEBI). After February 2, 2022, the restriction will be in effect.

Lump sum investments would no longer be permitted by funds only concerned with investing in overseas equities. While this is happening, funds with the option of allocating money between global and Indian equities may choose to devote a larger portion to the latter.

Up to a total of $7 billion for the sector and a maximum of $1 billion per scheme, mutual funds are only allowed to invest in foreign securities, according to SEBI.

Association of Mutual Funds in India (AMFI), a trade group, explained in a letter to fund companies that mutual funds may use the headroom provided in the overseas investment limit due to repayments and subsequent sale of overseas securities post-February 1, 2022. 

What were the previous limits?

According to SEBI regulations, each fund institution can only invest up to US$1 billion (approximately Rs 7,400 crore today) in foreign markets (excluding foreign ETFs). Furthermore, the mutual fund sector has an investment cap of US$7 billion. The sum is capped at US$300 million per AMC and US$1 billion for the industry for investments in foreign ETFs.

More fund firms added gates to their overseas mutual funds in the following days, which raised some eyebrows. As a result, AMFI released instructions to address the problem and provide everyone with an explanation. It should be highlighted that AMFI has only requested that funds that cannot invest in Indian stocks slam on the anchors. 

What are the new changes?

The regulations governing foreign investment have already undergone numerous revisions by SEBI. No significant obstacles exist to raising these restrictions and creating more space for future foreign investments.

According to reports, these restrictions will be increased in the upcoming weeks. As a result, investors do not need to rush into devising novel strategies for purchasing international equities. You can hold off for a couple more days if you want to invest in foreign mutual funds. Existing SIP investors are welcome to stick with their current investing strategy. 

Will re-opening funds help investors?

Equity markets worldwide, including those in the US, have fallen since February for various reasons, such as the crisis in Russia and Ukraine, concerns about rising interest rates as a result of inflation, and so on. Investors have redeemed units, causing fund houses to liquidate their assets and reimburse the investors.

According to SEBI’s clarification, mutual funds can use the additional headroom in the overseas investment cap made possible by foreign security redemptions and ensuing sales after February 1, 2022.

How long will the investment window remain open?

The acceptance of investments in these scams provides a brief reprieve. The fund houses are not permitted to take in any more money if they reach the cap on February 1, 2022. As a result, each fund house will monitor the money coming in, and when their respective thresholds are reached, subscriptions may halt.

The AMC maintains the right, at its discretion, to suspend subscriptions if it approaches the available headroom limit as of February 1, 2022. Investors will get supplementary communication in this regard.

Bottom Line

Be cautious when investing in these international schemes because many thematic offerings have recently suffered greater losses than diversified equity funds that invest in domestic equities. It is best to invest in things you understand than to stick with diverse index funds located in the US and accept long-term market results.

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