 "Mutual funds (MFs) are gearing up with offerings centered on the ‘quality' theme, as this investment approach is expected to rebound following three years of underperformance compared to the ‘value' theme.")
The Securities and Exchange Board of India (Sebi) has allowed Indian mutual funds (MFs) to invest in overseas mutual funds or unit trusts that include a certain percentage of Indian securities in their portfolios. However, there is a limit: these overseas funds can only invest up to 25% of their total assets in Indian securities.
This new rule is aimed at making it easier for Indian mutual funds to invest abroad while also ensuring greater transparency in how these investments are managed. It also allows Indian MFs to better diversify their investments by including foreign funds in their portfolios.
The new guidelines take effect immediately.
Market regulator Sebi has set some specific conditions for these investments:
For instance, the money that Indian MFs contribute to these overseas funds must be pooled together into a single investment vehicle, meaning there shouldn’t be any separate or "side" vehicles for different investors.
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Additionally, the overseas mutual funds must operate as a "blind pool," meaning there should be no separate portfolios for different investors.
All investors in these overseas funds will have equal rights to the fund's returns, based on how much they invested, ensuring fairness.
Sebi has also banned any advisory agreements between Indian MFs and the overseas funds they invest in, to avoid any potential conflicts of interest. This ensures that decisions are made in the best interest of all investors, without any outside influence.
If the foreign fund goes over the 25% limit, Indian mutual funds have six months to see if the foreign fund fixes the problem before they can invest more money.
In its circular, Sebi said, "Indian mutual fund schemes may also invest in overseas MF/UTs that have exposure to Indian securities, provided that the total exposure to Indian securities by these overseas MF/UTs shall not be more than 25 per cent of their assets." At the time of making investments (both fresh and subsequent), Indian MF schemes will have to ensure that the underlying overseas MF/UTs do not have more than 25 per cent exposure to Indian securities.
Subsequent to the investment, if the exposure breaches threshold, an observance period of six months from the date of publicly available information of such breach would be permitted to Indian MF schemes for monitoring of any portfolio rebalancing activity by the underlying overseas MF/UT.
During the observance period, the Indian MF scheme would not undertake any fresh investment in such overseas MF/UT and can resume their investments in such overseas MF/UT in case the exposure to Indian securities by such overseas MF/UT falls below the limit of 25 per cent.
Key points:
- Investment Limit: Indian MFs can invest up to 25% of their net assets in overseas funds.
- Transparency and Investor Protection: SEBI has mandated that all investor contributions to an overseas fund must be pooled into a single investment vehicle.
- No Segregated Portfolios: To ensure fair treatment of all investors, the corpus of an overseas fund should be a blind pool with no segregated portfolios.
- Prohibition of Advisory Agreements: To avoid conflicts of interest, advisory agreements between Indian MFs and underlying overseas MFs are prohibited.
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