Mutual fund investors have suffered due to regulatory limits on overseas investments, especially in the past year. Fund houses were instructed to stop accepting new subscriptions in schemes that invest in overseas securities from February 1, 2022, as the RBI’s $7 billion cap for such investments was nearing its limit. Similarly, last year, mutual funds were asked to halt flows into overseas ETFs as the $1 billion cap for such funds was almost exhausted.
Nirav Karkera, Head of Research at Fisdom, highlighted the impact of these restrictive caps on investors, stating that many missed out on the opportunity to invest in major markets like the US and China. He suggested that lifting the caps could lead to a surge in investment in these funds, given the strong performance of US equities, such as the S&P 500, which returned 26% last year compared to Nifty 50’s 8.7% gains.
Investors who favored schemes investing in tech-heavy indices like the Nasdaq Composite were particularly affected by the investment limits. Additionally, opportunities to invest in Chinese equities, which saw attractive valuations last year, were missed due to the restrictions.
Amol Joshi, founder of PlanRupee Investment Services, noted that many international funds had stopped accepting new investments, leading to a decline in overseas exposure for domestic investors. The industry has been advocating for a relaxation of these limits, with frequent consultations held with regulators to address the issue.
Despite the restrictions on mutual funds, individual investors can still directly invest in overseas shares up to $250,000 per financial year under the Liberalized Remittance Scheme (LRS). However, mutual funds offer a more managed approach to overseas investments and may be a safer option compared to other investment avenues like cryptocurrencies and real estate.
The article also mentioned that the share of overseas investments in domestic funds has been decreasing as incremental flows are directed towards Indian equities. The industry hopes for a reconsideration of the current limits to provide investors with more opportunities for international diversification.
