In order to avoid breach of industry-wide overseas limits set by the Reserve Bank of India (RBI), International Funds have stopped accepting new lumpsum, systematic investment plans (SIP), systematic transfer plans (STP) subscriptions after February 1, 2022.
However, there is no impact on fresh SIP or lumpsum transactions done till February 1, 2022. Some fund houses like Mirae Asset have stopped even past SIPs/STPs (registered till February 1, 2022) in Fund of Funds (FOF) investing in International Funds and which will be reactivated on the limit is hiked by RBI.
Investment limit through mutual funds
The existing overseas investment industry limit set by RBI is $ 7 billion, plus $ 1 billion for foreign ETFs.
No impact on these transactions
- There will be no impact on switches from regular to direct plans and vice versa.
- No impact on redemptions, switch outs, systematic withdrawal plans from these funds.
Investors should note that this is a temporary suspension and the fund houses will start accepting fresh subscriptions once RBI hikes the overseas investment limit.
Does it impact existing investors in international funds?
In a note shared with investors, Rajeev Thakkar, Chief Investment Officer, PPFAS Mutual Fund explains, “For the existing investments, nothing changes. Our portfolio is as it was. Our Net Asset Value (NAV) will go up and down based on the performance of our investee companies and market conditions. There have been irrational fears that this could lead to a drop in NAV etc. Nothing of such a nature will happen. There is also no restriction on redemptions. The same terms that were there earlier for redemptions are applicable today as well. We cannot remit further funds abroad starting February 2, 2022, till the time the limits are increased. Hence on an incremental basis, all investments will be in Indian stocks (we can surely sell something from our foreign stocks and buy some other foreign stocks, we just cannot remit money out).”
Have funds stopped investing in global stocks?
Since there is no restriction on past SIPs and STPs, AMCs are permitted to invest these monies into global stocks if they remain within the per fund house investment quota, which is $ 1 billion per fund house. There is additional scope of investing up to $ 300 million per fund house for ETFs.
“Some amount might be invested in cash, depending on the quantum of inflows. Mutual funds get daily redemptions so fund managers can deploy money coming from past SIPs/STPs into global stocks. Since fund houses are aware of the quantum of money coming into international funds through past SIPs/STPs, they are able to take the investment call accordingly. Some funds which invest in a mix of domestic and international equities can deploy the money coming from past SIPs into domestic equities,” says Anil Ghelani, Head - Passive Investment & Products, DSP Mutual Fund.
Why is there a limit on overseas investment?
The RBI controls the quantum of money going abroad from India to manage the INR movement. However, inflows and outflows coming through Foreign Portfolio Investment (FPIs) into domestic equities are not restricted.
“Rupee is not a fully convertible currency. Every transaction like when you go for a vacation abroad, pay for college fees for children abroad, or Indian companies setting up subsidiaries or joint venture abroad is tracked by RBI. For instance, through the Liberalised Remittance Scheme (LRS), an individual can invest $2,50,00 per fiscal year. These limits have been placed to manage the rupee movement and control the Balance of Payment. However, there are certain limits on foreign investors investing in debt securities in India. For instance, under the Voluntary Retention Route (VRR), FPIs can invest up to Rs 2.5 lakh crore in government and corporate debt securities,” explains Anil.
What are the current options?
If you are looking for international diversification, you can still invest through Fund of Funds (FOF) which invest in ETFs listed on foreign bourses. Further, you can also transact in international ETFs/funds with other participants through stock exchanges. However, no new unit creation will happen in funds where underlying investments are stocks as fund houses have stopped taking fresh subscriptions.
Prableen Bajpai, Founder, FinFix Research, explains, “The route to investing outside India via mutual funds is partially blocked as the industry is close to reaching a mark of $7 billion which has been defined by the RBI in 2008. There are close to 65 schemes that offer global investing, and a majority are structured in a way that they fall into the common pool of $7 billion.
However, there is a segment that offers a separate limit of $1 billion to invest outside. Currently, only four schemes are a part of this separate pool out of the total 65 schemes. All four schemes are passive strategies and offer exposure to some of the most preeminent indexes in the U.S. through overseas ETFs.”
These are:
Invest via Liberalised Remittance Scheme
Dhaval Kapadia, Director – Portfolio Specialist, Morningstar Investment Advisers India, says that investors can park the surplus, planned for investing in overseas funds, into liquid funds and await further information from fund houses.
“Investors can invest into overseas securities via the (LRS) facility of RBI. Various online platforms do provide options to invest in multiple equity markets worldwide via the LRS route. The LRS route involves remitting foreign currency abroad to make required investments.”
To sum up, if you have no exposure to international stocks in your portfolio, you can look at investing in FOFs which are investing in overseas ETFs.