Unlocking Global Opportunities: Mutual Funds Can Now Invest in Overseas MFs with Indian Securities

Nov 06, 2024

The investment landscape is continually evolving, adapting to changes in regulation and market dynamics. One of the most significant recent developments is the allowance for Indian mutual funds to invest in overseas mutual funds (MFs) and unit trusts that have exposure to Indian securities. This regulatory change not only broadens the investment horizon for domestic mutual funds but also has implications for investors, fund managers, and the overall market.

In the circular dated November 4, the Securities and Exchange Board of India (SEBI) stated, Mutual Funds are permitted to invest in overseas securities which also includes investment in overseas Mutual Funds/Unit Trusts ('MF/UTs').

This move by SEBI is designed to simplify investment processes, enhance transparency, and enable broader diversification in overseas investments. As mentioned in the circular, there is a limit on investment, Indian MFs can invest up to 25% of their net assets in overseas funds.

Following an investment, if the exposure surpasses the threshold, Indian MF schemes will be granted a six-month observation period from the public disclosure date of the breach, during which they can monitor any rebalancing actions taken by the underlying overseas MF/UT.

[Read: Is It Worthwhile Adding International Mutual Funds to an Investment Portfolio?]

The market regulator has outlined specific conditions that these MFs and UTs must meet, with a total of five criteria to be fulfilled.

  1. Pooling - Contribution of all investors of the overseas MF/UT is pooled into a single investment vehicle, with no side-vehicles including segregated portfolios, sub-funds or protected calls, etc.

  2. Pari-passu and Pro-rata - Corpus of the overseas MF/UT is a blind pool (i.e. common portfolio) with no segregated portfolios. All investors in the overseas MF/UT have pari-passu and pro-rata rights in the fund, i.e. they receive a share of returns/gains from the fund in proportion to their contribution and have pari-passu rights

  3. Independent investment manager/fund manager - Overseas MF/UT is managed by an independent investment manager/fund manager who is actively involved in making all investment decisions for the fund. This ensures that the investments are made autonomously by the investment manager/fund manager without influence, directly or indirectly, from any of the investors or from any other entity

  4. Public disclosure - Such overseas MF/UTs disclose their portfolios at least on a quarterly interval to the public to maintain transparency

  5. No advisory agreement - There shall not be any advisory agreements between Indian Mutual Funds and underlying overseas MF/UTs, to prevent conflict of interest and avoid any undue advantage to either of the parties

A notice cum addendum is issued to all the investors and the provisions of this circular shall come into force with effect from the date of this circular i.e. November 04, 2024.

While the SEBI circular opens up numerous opportunities for Indian mutual funds, it also presents challenges that must be carefully managed:

  • Fund managers must ensure compliance with all relevant regulations, which may require significant resources and expertise.

  • Investing in overseas mutual funds introduces currency risk, as fluctuations in exchange rates can impact returns. Additionally, international markets can be subject to different economic conditions and political risks, which fund managers must account for in their investment strategies.

  • Investing in overseas mutual funds may involve higher fees and costs compared to domestic investments.

  • As mutual funds venture into overseas investments, it is crucial to educate investors about the associated risks and opportunities.

Impact on Investors and the Mutual Fund Industry

  • Investors will have access to a wider array of investment options as mutual funds can include overseas funds in their portfolios.
  • The ability to invest in overseas funds is likely to intensify competition among mutual fund houses. Fund managers will need to innovate and enhance their offerings to attract investors, leading to improved performance and better services.

  • The inclusion of overseas mutual funds can positively influence the performance of Indian mutual funds. By diversifying their portfolios and accessing high-quality global funds, mutual fund houses may deliver better returns for their investors.

  • As mutual funds explore overseas investments, SEBI will need to maintain stringent regulatory oversight to ensure compliance with the established guidelines and protect investor interests.

  • As investors see the potential benefits of diversified global investments, they may be more inclined to allocate funds to mutual funds offering overseas exposure.

This move by SEBI is a landmark development for the mutual fund industry. This regulatory change not only enhances investment opportunities for mutual funds but also provides investors with greater choice and potential for improved returns.

As mutual funds navigate this new landscape, they must carefully consider the associated risks and challenges while capitalizing on the benefits of international diversification. By doing so, they can position themselves to deliver value to investors in an increasingly interconnected world.