Global mutual fund schemes resurrect as outflows create headroom

Investors have pulled out Rs 875 crore between April and June from these schemes amid tax changes

Continued outflows from international mutual fund (MF) schemes have made room for fresh investments. SBI MF and PGIM MF have recently opened their schemes to fresh subscriptions.

In March, Edelweiss MF and Mirae MF opened their schemes to subscription; they continue to accept fresh inflows. According to MF executives, outflows from international schemes have surged in recent months as investors booked profits after a strong run-up in global markets, especially the US.

The inflows into international schemes have remained negative for the past three months, with net outflows adding up to Rs 875 crore.

“Most international funds have delivered good returns in the past three to six months, and it looks like there has been profit-booking. This has led to the creation of headroom for funds to accept fresh inflows,” says Niranjan Avasthi, senior vice-president and head of product, marketing, and digital at Edelweiss MF. Fund houses have been forced to limit inflows into their international MF schemes after they came close to exhausting their international investment limits in January 2022.

Since then, they have been allowed to accept money and deploy in international stocks only when their total deployment in international stocks falls below the 2022 February 1 levels.

According to Mahavir Kaswa, head-research (passive funds), Motilal Oswal Asset Management Company, the expectations of a recession in the US and a rising momentum in the Indian market could have nudged investors to redeem their international MF holdings.

“The expectations of a recession in the US have increased over the past few quarters, given the unprecedented rate hikes by the US Federal Reserve (Fed). At the same time, Indian markets have done relatively well in comparison to other major markets. This has led to some profit-booking by investors in international funds,” says Kaswa.

The fact that international funds no longer offer tax benefits for long-term holdings has also affected inflows, observe MF executives.

Until March 2023, international MF investors were eligible to long-term capital gains tax benefits if they held investments in debt and international funds for over three years. They no longer enjoy this advantage. 

“Money continues to flow in, but the quantum has taken a hit due to tax change,” says Avasthi. The outflows have coincided with the improvement in returns of international MF schemes. 

After sharp corrections in most international markets in 2022, there has been strong recovery in 2023. For instance, the Nasdaq 100-based passive schemes, which ended 2022 with a 26 per cent decline, delivered six-month returns of 33 per cent (as of July 12). Other US, Taiwan, and Europe-focused schemes, particularly those investing in technology stocks, have also generated good returns this calendar year. Mirae Asset NYSE FANG+ ETF and Edelweiss US Technology Equity FoF have gained over 40 per cent in 2023, according to Value Research data.

Analysts have turned cautious about the US market after the recent rally. “The US market valuations are now above their 10-year average. A large part of the returns in 2023 will be driven by the top seven stocks. Further upside in the near term can be limited and will likely depend on triggers, including a shift in Fed policy stance and broadening of market rallies. 

"US market valuations are now above their 10-year average. A large part of the returns in 2023 have been driven by the top seven stocks. Further upside in the near term can be limited and will likely depend on triggers including shift in US Fed policy stance and broadening of market rally. In our view, this is not a time to go overweight or underweight on US Equities. Stick to your long term structural global allocation to the US," said Shrinath ML, Senior Research Analyst, FundsIndia.

Based on valuation, the Chinese markets look the most attractive right now. However, repeated regulatory crackdowns and geopolitical risks have weighed down market performance.