Market regulator SEBI recently warned mutual fund institutions that the cap on investment in foreign assets was nearing exhaustion, resulting in a restriction on new capital inflows into foreign mutual funds. From February 2, 2022, fund companies will be prohibited from buying listed shares, securities or fund units in other countries (other than exchange-traded funds). There is currently a $7 billion limit for the mutual fund industry in India on investments in offshore assets. However, SIP investors of existing mutual funds may not be affected by the changes, and there are other investment opportunities, experts say.

Industry group Association of Mutual Funds of India (AMFI) has called on mutual fund institutions to refrain from further investing in international assets until the cap is changed. As a result, all fund houses have agreed to suspend new inflows, whether lump sum, SIP or STP, into all funds that invest in foreign assets.

Investors choose foreign funds because of the superior returns of US indices, a weak rupee against the dollar, and more investment options in foreign markets. Although direct access to foreign equities is possible, mutual funds offer an attractive alternative for Indian investors looking to engage in international equities.

However, the limitation will not affect current SIPs/STPs in offshore investments at this time. MF schemes that invest in ETFs listed in other countries will also continue to operate as they have another limit. It appears to be a temporary measure by the regulator to prevent the industry-wide $7 billion offshore investment limit from being exceeded. A long ban on taking new lump-sum investments in these funds could cause Indian investors to lose the superior earnings of US index prospects.

Article first published: Saturday, February 5, 2022, 2:40 p.m. [IST]