AMCs shall not make any incremental investments in overseas funds or securities beyond what is existing as on February 1, 2022
The Association of Mutual Funds in India (AMFI) has asked the mutual fund houses to stop accepting fresh lumpsum investments in schemes dedicated to investing in overseas stocks. The industry body has also asked the mutual funds to stop accepting fresh systematic investment mandates from the investors. This suspension will be applicable from Wednesday – February 2, 2022. This means, you can make your investments in these schemes, till the cut-off time (3 PM), February 1.
Why suspend fresh investments?
The capital market regulator, Securities & Exchange Board of India (SEBI) has set up a limit of US $1 billion per fund house and US$7 billion for the mutual fund industry. Also there is a separate limit of US $ 1 billion for mutual fund schemes investing in exchange-traded funds listed overseas. Since the industry has almost reached this limit of US$7 billion, AMFI has issued this direction of not accepting fresh investments.
In a communication to the fund houses over the week, AMFI said: “AMCs shall not make any incremental investments in overseas funds or securities beyond what is existing as on February 1, 2022 at respective mutual fund level. In other words, the total utilization of each AMC of the overseas limit shall be capped at the amount as of end of the day – February 1, 2022, in order to ensure compliance with the SEBI direction,” wrote AMFI.
Put simply, the fund houses cannot buy listed shares or securities or units of schemes overseas (other than exchange traded funds) from February 2, 2022. To be sure, only inflows in India-based schemes that invest in international securities of other mutual fund schemes abroad is stopped, temporarily. The funds that invest in global ETFs, will continue to accept money from investors.
Does this mean I cannot, now, invest in international funds?
Yes, but only temporarily. Investors cannot make lump sum investments in these schemes from February 2. They cannot sign up for fresh systematic investment plans and systematic transfer plans in schemes that are investing in overseas stocks or feeding into mutual fund schemes overseas, except ETF. The fund houses and the mutual fund distribution platforms will make necessary changes to not accept such investments.
Though it is allowed to continue with the existing SIP and STP for time being, the fund houses will hit the wall. The fund houses are not allowed to make incremental investments overseas after February 1, 2022. Hence schemes that invest only in overseas securities as per the asset allocation mentioned in the scheme information document, will be forced to stop accepting money through existing SIP or STP.
Schemes that have the option to allocate money between Indian stocks (or units of ETF investing in overseas stocks) and the overseas stocks, have to decide if they want to invest the incremental money into former. If the fund managers are comfortable with that choice and the SID permits that then they can continue with accepting flows through SIP and STP. For instance, PPFAS Mutual Fund announced that it will stop accepting fresh lumpsums and new registration of SIP and STP investments in its flagship Parag Parikh Flexicap Fund, effective February 2, 2022. A distributor familiar with the fund house’s thinking tells us that PPFAS MF wants to retain the scheme’s characteristic of investing up to 35 percent in international equities. Additional inflows going forward might distort the asset allocation, he adds. The scheme, however, will continue existing SIPs and STPs.
Mutual fund houses have been asked to issue addenda for schemes that are getting affected about the acceptance of investments.
How have fund houses reacted to this?
Effective January 14, 2022, Motilal Oswal Mutual Fund has stopped accepting lumpsum investments in three of the international schemes Motilal Oswal S&P500 Index Fund, Motilal Oswal MSCI EAFE Top 100 Select Index Fund and Motilal Oswal Nasdaq 100 Fund of Fund. It has also ceased creating units of Motilal Oswal Nasdaq 100 ETF.
DSP Global Innovation Fund of Fund has decided to alter its investment strategy for time being. Instead of investing in a mix of four overseas mutual fund units and two ETFs, it will allocate the money to the units of two ETF only.
What about redemption and switch out?
You are free to sell your investments in schemes which are not accepting fresh investments. You can also switch out from these schemes to other schemes as well. There is no restrictions of whatsoever nature. Like any other sale of mutual fund units, each switch out or redemption is subject to exit load and taxes applicable.
When will they accept fresh investments?
Mutual fund industry is waiting for the limit to be hiked by the regulator. The Reserve Bank of India is expected to decide on the issue of this industry wide limit on the overseas investments. Industry insiders are of the opinion that the limit will be raised sooner and notified by SEBI, most probably after the announcement of Union Budget 2022.
SEBI had announced the hike in foreign investment limit for each mutual fund house to US$1 billion in June 2021. Earlier in November 2020, the limit was doubled for each fund house to US$ 600 million.
What should you do?
If you still wish to invest overseas, there are two alternatives. One, you could still buy ETFs (like the Nasdaq 100) on Indian stock exchanges. But there is a catch. “While buying units of ETF do check the prices as they may quote at a premium to net asset value as new units won’t be created till the limit is raised,” says Amol Joshi, Founder of Plan Rupee Investment Services. He sees the current stop on overseas investments to be temporary in nature and expects resolution of this issue by regulators soon.
Your second option to directly buy stocks listed overseas. Here, you need to make an informed choice about which company’s shares you wish to buy and which ones to avoid. Only investors who can choose the right stocks or have an investment advisor guiding them should do that. Your third option is the best option. Wait for mutual funds to resume their investments as and when the limit is enhanced. Vishal Dhawan, Founder and Chief Financial Planner, Plan Ahead Wealth Advisors also sees the current situation of suspended overseas investments by mutual funds as a temporary phase. He prefers investors going through Indian mutual fund route while investing overseas. “Though investors have the choice of going direct and some may want to tap simple products such as the index ETFs overseas directly, operational issues and costs involved, and the tax compliance make it a cumbersome task for many retail investors,” he added.
NIKHIL WALAVALKAR JANUARY 31, 2022 Source Credit- Money Control