The Securities and Exchange Board of India (SEBI) has proposed allowing Indian mutual funds to invest in overseas mutual funds or unit trusts that in turn invest a portion of their funds in Indian securities.
File Photo: SEBI
The Securities and Exchange Board of India (SEBI) has proposed allowing Indian mutual funds to invest in overseas mutual funds or unit trusts that in turn invest a portion of their funds in Indian securities.
In a consultation paper floated on Friday, the market regulator has proposed that these mutual funds be allowed to invest in such overseas funds with conditions including a 20 per cent upper limit on overseas funds’ total exposure to Indian securities.
It said though the investment framework for mutual funds does not explicitly forbid them from investing in such funds, Indian mutual funds usually avoid doing so.
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As per the SEBI’s paper, this affects Indian mutual funds’ ability to diversify their portfolio. They are unable to invest in foreign funds that may allocate a portion of their funds to Indian securities considering the country’s strong economic growth.
“In order to diversify the portfolio, and as part of overseas fund of funds (‘FoFs’) schemes, the Indian Mutual Funds often invest in overseas securities including units of overseas MF/UTs, ETFs and index funds,” the SEBI paper said.
“However, ambiguity regarding investments in such overseas funds that may invest a certain portion of their funds in Indian securities deters Mutual Funds from investing in those overseas MF/UTs, ETFs, and index funds that invest in a basket of countries, which may include India,” it added.
It also suggested certain conditions to ensure that these structures are not misused and to ensure that investors get efficient cost structures. “If an overseas Fund of Funds (FoF) offered by an Indian Mutual Fund invests in overseas MF/UTs with a significant allocation to Indian securities, it may not be true to the fund’s label, and may not reflect the overall purpose of investing in such FoFs.”
It added that investing in Indian securities directly would also be more cost-effective for Indian clients than investing through such overseas fund of funds.
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