SEBI relaxes overseas investment limit for mutual funds

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The Securities and Exchange Board of India (SEBI) has increased the overseas investment limit for individual mutual funds (MFs) to $600 million. Earlier, this limit was $300 million.

The regulator in a circular issued on November 5, 2020, stated that within the overall industry limit of $7 billion, each fund house can make a maximum of $600 million in overseas investments.

“If the limits hadn’t been enhanced, some of the larger funds could have hit the upper limit in the coming days,” says Rajeev Thakkar, chief investment officer.

Limits raised after quite a while

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The last time the limits were tweaked for mutual funds was 12 years back, when the Reserve Bank of India (RBI) increased the overall industry limit to $7 billion, from $5 billion.

“This move will help fund houses that have taken a lead in offering international funds to scale up their products and also offer more products,” says Aashish Somaiyaa, chief executive officer of White Oak Capital.

Recently, there has been a pick-up in the number of new schemes being floated by fund houses that give investors exposure to international equities.

Investors have shown an appetite for such funds, which give geographical diversification to their investment portfolio.

How MFs can use these limits?

SEBI has also laid down guidelines on how schemes will be allowed to use these new limits.

For existing schemes, 20 per cent of last three months’ average assets held in overseas investments (ETFs or equities) will be allowed, subject to the limits mentioned above.

On new fund offers (NFOs), SEBI has said that a scheme would need to utilise the available limit within six months from closure of the NFO. If not, the limits will become available for unutilised industry-wide limits.

Reserved limits for each MF

The regulator has also reserved $50 million for each fund house, regardless of whether it has an international scheme offering or not.

Experts say this would effectively mean that the 40-odd fund houses in the industry already have about $2 billion reserved. While this would effectively bring down the overall limit down to about $5 billion (from $7 billion), experts say it should not be a problem as there are still not many fund houses focusing on international offerings.