Overseas doors wide open for MFs

Investors can now park money in practically all overseas firms via domestic mutual funds (MFs). The removal of this key deterrent will encourage investment in the funds.

Other incentives proposed by the finance minister for the mutual fund sector includes scrapping of dividend distribution tax levied on close-ended equity schemes and easier access to government securities via computerised trading systems.

In line with the global nature of equity investment, the Budget scrapped the provision that forced domestic funds to invest only in those foreign companies which held at least 10 per cent stake in a listed Indian firm.

"We are very excited as the change opens up the possibility of even small MF investors protecting their investments in equity from the vagaries of Indian stock markets," said Rajat Jain, CIO of Principal PNB AMC, the only firm with a dedicated offshore equity fund.

Jain's Global Opportunities fund manages just around Rs 15 crore largely owing to the restriction. Other funds too have held back from exploring options overseas till now.

"While the limit for foreign equity investment for all the funds in India was around $1 billion till now, I don't think such investments by all players put together come to over $10 million," he added. However, foreseeing a rise in such outflows, the Budget also raised the total limit to $2 billion.

Further, the Budget allowed a limited number of qualified local MFs to invest cumulatively up to $1 billion in overseas exchange traded funds.

This will also open up another window of opportunity for Indian investors.

The changes will encourage funds to limit their exposure to any dramatic downturn in the Indian bourses by diversifying into unrelated markets like the British and Japanese ones.

"Indian markets are approaching higher valuations, and this gives us opportunity to even out returns. Earlier, funds could invest only in foreign companies like Unilever, P&G and Honda, but now I can buy shares of Microsoft, Caterpillar etc," said N Prasad, CIO of Sundaram Mutual.

"Opening up the NDS (negotiated dealing system) to funds will increase liquidity in the system and aid in price discovery," said R Swaminathan, national head - MFs, IDBI Capital Market.

Shashi Krishnan, CEO of Cholamandalam AMC, said, "There were no nasty surprises like capital gains tax. With this Budget, we will see people put more money into MFs in the coming months, acting as counterweight to FIIs."