According to news reports, the Reserve Bank of India (RBI) and the finance ministry are mulling over the option of allowing domestic mutual funds (MFs) to trade in global depository receipts (GDRs) and American depository receipts (ADRs) of Indian companies. This will allow domestic MFs to avail of the arbitrage opportunities offered by the difference between the GDR/ADR prices of Indian companies and their stock prices on domestic bourses.

This move will give local MFs a level playing field with the foreign MFs. Currently, overseas MFs are permitted to invest in GDR markets as well as the domestic market. This allows them to exploit arbitrage opportunities, while their Indian counterparts are denied this opportunity.

Moreover, if domestic funds are permitted to trade in GDRs/ADRs, it will serve as another investment avenue apart from domestic equity/equity-related instruments, debentures, bonds and money market instruments. This diversification will broaden the investment horizon of the Indian fund manager, allowing him greater flexibility in his decision-making.

This is undoubtedly a positive move for the MF sector and if fund mangers invest judiciously, they can exploit this to their benefit. Improved performances by the funds, will in turn encourage more investors to get on the MF bandwagon.

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