Reserve Bank of India (RBI) has permitted mutual funds (MFs) to issue units to non-resident Indians (NRIs) and financial institutional investors (FIIs) as long as the scheme complies with Securities and Exchange Board of India (SEBI) guidelines.

Earlier MFs had to seek RBI approval for issuing units to NRIs and FIIs. This was a procedural hassle that constrained NRI/FII inflows in MFs. With RBI allowing MFs more freedom, the passage for NRI/FII investments in the Indian MF sector will get a lot smoother. MFs will also be permitted to repurchase the units from FIIs and make payments to them.

MFs are finally getting a free hand in their dealings with RBI distancing itself from regulation. Earlier, RBI had passed on the mantle of regulating money-market MFs (MMMFs) to SEBI.

As far as inflows are concerned, NRI/FII investments will definitely see an upturn following RBIs move to curtail restrictions. While so far, Indian investors (retail and institutional) have participated in the good fortunes of the MF segment in a big way, now even NRIs/FIIs can hope to reap the benefits without any procedural hurdles. The MF segment is likely to witness greater dollar inflows from these quarters. In future, funds may design products/services with increased focus on these investors so as to attract higher inflows.

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