The Securities and Exchange Board of India (SEBI) has proposed allowing Indian mutual funds to invest in overseas mutual funds or unit trusts that allocate a portion of their funds to Indian securities. This move aims to provide Indian mutual funds with the ability to diversify their portfolios.
In a consultation paper released on May 17, SEBI suggested that these mutual funds be permitted to invest in such overseas funds, subject to certain conditions. One of the key conditions is an upper limit of 20 percent on the overseas funds’ total exposure to Indian securities.
Although the existing investment framework for mutual funds does not explicitly prohibit them from investing in such funds, Indian mutual funds have typically avoided doing so. SEBI acknowledged that this has affected their ability to diversify their portfolios and prevented them from investing in foreign funds that may allocate a portion of their funds to Indian securities, considering the country’s strong economic growth.
SEBI cited examples to illustrate this point, such as the MSCI Emerging Markets Index having an 18.08 percent weightage to Indian securities as of April 30, 2024, and JP Morgan’s ‘Emerging Markets Opportunities Fund’ holding approximately 15 percent in Indian investments as of March 31, 2024.
To ensure that these structures are not misused and to provide investors with efficient cost structures, SEBI has proposed additional conditions. For instance, the regulator emphasized the need for funds to align with their labels, suggesting that if an overseas Fund of Funds (FoFs) offered by an Indian Mutual Fund invests in overseas funds with significant exposure to Indian securities, it may not reflect the overall purpose of investing in such FoFs.
SEBI also proposed guidelines for Indian mutual funds to follow when the 20 percent limit is breached and when the overseas fund is rebalancing its portfolio.
