Capital markets regulator Sebi on Friday proposed facilitating investments by mutual funds in overseas funds, which invest a certain portion of their assets in Indian securities. This is subject to the fact that the total exposure to Indian securities by such overseas funds should not be more than 20 percent of their net assets, Sebi said in its consultation paper.
The move would help keep the Indian Fund of Funds (FoFs) true to their label, coupled with cost-effectiveness, for investors. Considering the strong economic growth prospects of India, the country's securities offer an attractive investment opportunity for foreign funds and accordingly, various international indices, exchange-traded funds (ETFs), mutual funds (MFs), unit trusts (UTs) allocate a portion of their assets to Indian securities, Sebi noted.
As of April 30, 2024, the MSCI Emerging Markets Index has a little over 18 percent weight to Indian securities. Similarly, JP Morgan's Emerging Markets Opportunities Fund holds about 15 percent in Indian investments, according to its latest factsheet as of March 31, 2024.
To diversify the portfolio and as part of overseas FoF schemes, Indian mutual funds often invest in overseas securities, including units of overseas MFs, ETFs, and index funds. However, current ambiguity regarding investments in such overseas funds that 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.
Accordingly, Sebi has proposed that "Indian mutual fund schemes may invest in such overseas MF/UTs that have exposure to Indian securities, provided that the total exposure to Indian securities by such overseas MF/UTs shall not be more than 20 percent of their net assets".
The regulator noted that if an overseas 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 a FoF. Also, Sebi noted that direct investment in Indian securities by an Indian investor would be cost-effective rather than investing in Indian securities through an overseas FoF offered by Indian mutual funds.
"Therefore, to facilitate investments in such overseas MF/UTs, it may be prudent to permit Indian mutual funds to invest in such overseas MF/UTs having certain limited exposure to Indian securities.
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"Additionally, putting adequate safeguards for such investments would keep Indian FoFs true to their label as well as enable investors to take desired exposure in overseas securities," Sebi said. The Securities and Exchange Board of India (SEBI) has sought comments from the public till June 7 on the proposal.
While investing in such overseas MF/UTs, the Indian mutual fund schemes will have to ensure that the contribution of all investors of the overseas MF is pooled into a single investment vehicle, without the presence of any side vehicles; such overseas MF should be managed by an independent investment manager and such overseas MF should disclose their portfolios periodically to the public to maintain transparency.
Additionally, Sebi suggested that there should not be any advisory agreements between Indian mutual funds and underlying overseas MF, in a bid to prevent conflict of interest and avoid any undue advantage.
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Disclaimer: This story has been directly published from the agency feed. No changes have been made.