SEBI Asks Fund Houses To Stop Inflows in Overseas ETFs The limit to invest in overseas ETFs by mutual funds is $1 billion, which is now close to being breached
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Starting April 1, 2024, mutual fund houses will not be able to accept any more inflows in schemes that invest in overseas exchange-traded funds (ETFs). The directions to this regard has been issued by the markets regulator Securities and Exchange Board of India (SEBI) as inflows in these overseas ETFs have come close to the mandated investment limit of $1 billion.
The Association of Mutual Funds of India (AMFI) has sent a communication on the same to mutual fund houses. The letter stated that "AMCs should stop accepting subscriptions to funds investing in overseas ETFs from April 1, 2024. However, subscriptions to funds investing in overseas securities other than international ETFs may continue until the regulator communicates further."
The sharp run-up in US markets, fueled by US technology stocks is believed to be the reason behind the breach of the limit.
For the unversed, there are two types of mutual fund schemes that invest in overseas markets. One which directly buys shares abroad, and has a limit of $7 billion, and the other is a type of fund- typically a Fund of Fund that buys units of ETFs abroad with a limit of $1 billion.
The mutual fund industry has been requesting the central bank for revising the limit on the overseas investment from time to time since 2022. However, despite several requests, the central bank has yet to increase the limit. At present, there are 70 schemes focusing on overseas investment.
Commenting on SEBI directive, Chirag Mehta, CIO, Quantum AMC said, "Sebi's directive to mutual fund schemes with investments in ETFs listed on foreign exchanges comes as the Mutual Fund industry reaches close to the investment limit of $1 billion set by the regulator for this category. This is reminiscent of the time when the industry had reached the $7 bn foreign investment limit and had to suspend flows in funds investing in stocks overseas. These limits probably were put in place to limit outflows of foreign currency within a limit to reduce the impact on balance of payments and thereby on the Indian currency. The result will be that these mutual fund schemes will have to limit their inflows. It's been a long time since these limits were set and are probably due for enhancement."
