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FACT CHECKED
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March 28, 2023
International funds offer Indian investors exposure to companies outside India, providing diversification, access to global markets, and exposure to sectors not readily available domestically. However, recent restrictions imposed by SEBI on foreign investments in mutual funds have impacted the availability of international funds for Indian investors. Let's explore the impact of these restrictions.
Benefits of Investing in International Funds
Investing in international funds provides Indian investors with several advantages. Firstly, it allows for geographic diversification, spreading investments across different countries and reducing reliance on a single economy. This diversification helps mitigate risk and provides a more balanced portfolio. Additionally, international funds grant access to new investment opportunities unavailable in the Indian market.
In some cases, international funds offer the potential for higher returns compared to Indian funds due to the diversity and growth opportunities in developed countries. Lastly, global funds are managed by experienced professionals. Their expertise helps investors make informed decisions, reducing the risk of individual stock selection.
Post-pandemic Foreign Investment Boom
Foreign investments in both Indian and international mutual funds were booming post-pandemic. In June 2021, regulatory body SEBI, mandated mutual fund houses to collectively invest a maximum of USD 7 billion in foreign stocks to prevent disruption. Each mutual fund house is allowed to have a foreign investment exposure of up to USD 1 billion. Schemes that invest in ETFs listed overseas have a threshold of USD 1 billion. These amounts are included under the overall upper threshold.
Why did SEBI Pause International Investments in the Pandemic?
In early 2022, this limit was about to be breached. Hence no longer having access to a micro-scale, SEBI asked all mutual fund houses to suspend all outflow of foreign investment. Fund managers that couldn't divert to Indian securities had to choose between waiting for overseas investments to reopen or losing their recognition as international funds.
Impact of Stopping Foreign Investments
*All existing SIPs were halted unless their fund management could switch to Indian assets.
*Retail investors in international markets like China were low.
*The hedge against Indian market risk and the potential for big earnings was no longer an option.
*On a macro scale, the lack of access to profitable funds reduced business capital generation.
*It could have slowed the growth of SMEs and startups, hindering the Indian economy.
International Funds: Now Open to Indian Investors
In June 2022, SEBI amended its restrictions on foreign investments. Many mutual fund houses have announced that they will start accepting investments into international funds. This decision by SEBI is conditional on the rule that mutual fund houses do not breach the overall limit of ₹7 billion USD. Note: The directive could be temporary, so investors should be cautious about international funds.
Conclusion
The recent amendment by SEBI to allow Indian investors to invest in international funds, albeit with certain conditions, provides renewed opportunities for diversification and exposure to global industries. The reopening of international funds can contribute to the growth of the Indian economy by facilitating capital generation and supporting the development of SMEs and startups.
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Frequently Asked Questions
1. What is the limit for foreign investments from India?
According to SEBI, the overall industry limit for Mutual Funds from India is USD 7 billion.
2. Will SEBI increase the foreign investment limit for mutual funds?
There is no indication that SEBI will increase the foreign investment limit for international mutual funds. As of now, the limit remains the same as that of February 1, 2022.
3. How much can Indians invest in foreign stocks?
As per the regulatory body, Liberalized Revenue Scheme (LRS), Indian residents can invest up to $250,000 USD (around ₹2 crore) in foreign investments each year without any special permissions.
Investment and securities are subject to market risks. Please read all the related documents carefully before investing. The contents of this article are for informational purposes only, and not to be taken as a recommendation to buy or sell securities, mutual funds, or any other financial products.
As an expert in finance and investment, I bring a wealth of knowledge and experience to provide insights into the article titled "SEBI's Restriction on International Funds: What It Means for Indian Investors." My expertise is rooted in a deep understanding of financial markets, investment strategies, and regulatory frameworks.
The article discusses the recent restrictions imposed by the Securities and Exchange Board of India (SEBI) on foreign investments in mutual funds and its impact on Indian investors. Here's an in-depth breakdown of the key concepts used in the article:
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International Funds and Diversification:
- The article emphasizes that international funds offer Indian investors exposure to companies outside India. This exposure provides diversification benefits by spreading investments across different countries, reducing reliance on a single economy.
-
Benefits of Investing in International Funds:
- Geographic diversification helps mitigate risk and provides a more balanced portfolio.
- Access to new investment opportunities unavailable in the Indian market.
- Potential for higher returns compared to Indian funds due to diversity and growth opportunities in developed countries.
- Global funds are managed by experienced professionals, reducing the risk of individual stock selection.
-
Post-Pandemic Foreign Investment Boom:
- The article mentions that foreign investments in both Indian and international mutual funds were booming post-pandemic.
- SEBI mandated mutual fund houses to collectively invest a maximum of USD 7 billion in foreign stocks to prevent disruption.
-
SEBI's Pause on International Investments:
- In early 2022, SEBI imposed restrictions on foreign investments in mutual funds as the limit of USD 7 billion was about to be breached.
- Mutual fund houses had to suspend all outflows of foreign investment, impacting existing SIPs and the ability to hedge against Indian market risk.
-
Impact of Stopping Foreign Investments:
- Existing SIPs were halted unless fund management could switch to Indian assets.
- Retail investors in international markets faced challenges.
- Lack of access to profitable funds affected business capital generation and could slow the growth of SMEs and startups.
-
SEBI's Amendment and Reopening of International Funds:
- In June 2022, SEBI amended its restrictions on foreign investments, allowing mutual fund houses to start accepting investments into international funds, with a condition not to breach the overall limit of USD 7 billion.
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Caution for Investors:
- The article advises investors to be cautious about international funds as the directive could be temporary.
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Conclusion - Opportunities for Growth:
- The recent amendment by SEBI provides renewed opportunities for diversification and exposure to global industries.
- The reopening of international funds can contribute to the growth of the Indian economy by facilitating capital generation and supporting the development of SMEs and startups.
In summary, the article provides a comprehensive overview of the impact of SEBI's restrictions on international funds, the benefits of investing in such funds, and the subsequent amendment that reopens opportunities for Indian investors.
