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Stalemate in overseas MF limits puts investors in a spot

The S&P 500 and Nasdaq are down 24% and 31%, respectively. China’s Shanghai Composite is down 16%, while Germany’s DAX index is down 25%.

Stalemate in overseas MF limits puts investors in a spot
The directive to stop subscription was mainly on account of the industry crossing the mandated limit of $7 billion for overseas investments.

The reluctance of regulators to raise the cap on investment limits in mutual fund schemes that invest in overseas securities has left investors that have put money in such schemes in a lurch.

The Securities and Exchange Board of India (Sebi) had advised fund houses to stop subscription in schemes that invest in overseas securities on January 29. The directive to stop subscription was mainly on account of the industry crossing the mandated limit of $7 billion for overseas investments.

In June, however, the regulator allowed such schemes to resume subscriptions and make investments in overseas securities up to the headroom available as on February 1, 2022, at the mutual fund level, within the overall industry limits.

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While a few schemes did reopen for subscription, the majority of active schemes are now closed for subscription, either through lump sum or systematic investment plans, according to industry officials.

“It is not fair to the existing investors as they are not able to average out their investments. This stalemate has to be resolved and some breakthrough has to be found,” said Swarup Mohanty, chief executive of Mirae Asset MF.

Investors flocked to international funds in droves in the last-year-and-a-half amid a flurry of launches and attractive 3- and 5-year returns. As many as 29 such schemes have been launched since 2021 with a dozen focused on US equities.

“The investors may note that till any further clarification/notification is received from Sebi/Amfi in this regard, the overseas investment limit shall remain capped at the amount as on end of day of February 1, 2022. The AMC reserves the right to suspend the subscriptions/reject/refund the applications from the investors as and when it is close to the overseas investment limit available as on end of day of February 1, 2022,” reads the addendum of a large AMC, which reopened subscription in five of its schemes in June.

The S&P 500 and Nasdaq are down 24% and 31%, respectively. China’s Shanghai Composite is down 16%, while Germany’s DAX index is down 25%.

“From a market timing perspective, this would be a good time to invest since a lot of international markets have corrected significantly. Unfortunately, existing investors in some of these funds can’t average out because schemes are closed for subscriptions,” said Niranjan Avasthi, head – products, marketing and digital, Edelweiss Asset Management.

Financial planners believe that the current restrictions may create an asset allocation problem for investors who want to diversify in different geographies and reduce single-country risk.

“If your scheme has not opened then you may want to look at exposure to a comparable scheme from a different fund house. But do not go overboard and invest only to the extent your asset allocation allows. The US indices, for example, are trading near 52-week lows and present an opportunity to fill the asset allocation gap,” said Amol Joshi, founder of Plan Rupee Investment Services.

Investors can also look at investments into overseas ETFs because the $1-billion limit is yet to be fully utilised. Currently, MFs can make investments in overseas ETFs subject to a maximum of $300 million per MF, within the overall industry limit of $1 billion.

“Edelweiss international FoFs are open for subscriptions and we are seeing smart investors investing more and many continuing their SIPs at this point,” said Avasthi.

Last year in June, Sebi had increased the limit from $600 million to $1 billion per mutual fund within the overall industry limit of $7 billion.

Financial planners recommend setting aside 5-10% of one’s portfolio in international funds. Those who have already invested in international funds can stay put and hope for markets to recover, and mean reversion to play out.

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