On 4th November, the Securities and Exchange Board of India (SEBI) issued a circular allowing mutual funds to invest in units of overseas funds with less than 25% exposure to Indian equities. This provides significant benefits to both fund houses and individual investors.

Q. What Are The New Norms Regarding Investments by Domestic Mutual Funds In Overseas Funds?

On 17th May, SEBI floated a consultation paper proposing a framework to facilitate investments by domestic mutual funds in overseas funds with Indian exposure. The circular issued on 4th November builds upon this paper. While the paper had proposed a limit of up to 20%, the final regulation sets the limit at 25%. Simply put, Indian mutual funds can now invest in units of overseas funds with less than 25% exposure to Indian equities.

Q. Why Is the Limit Set At 25% For Overseas Funds With Indian Exposure?

Certain global funds include Indian assets as a component of their schemes, alongside assets from other markets. However, if such a fund has significant exposure to Indian securities, it defeats the purpose of making an overseas investment. Moreover, why would an Indian investor seeking exposure to Indian assets take a roundabout route through overseas funds? It would simply not be cost-effective. Hence, the need for a cap.

Q. How Will The New Norms Benefit Local Fund Houses And The Industry?

There was some ambiguity in the regulations regarding investments in overseas funds with some Indian exposure. The new rule resolves this issue.

Mutual funds can now mobilize more funds for overseas investments, supported by the clarity provided by SEBI. The updated norms will also enhance regulatory transparency and strengthen risk management practices within the industry. Additionally, the revised regulation minimizes the risk of round-tripping of money and promotes greater transparency.