The funds that are impacted are not only pure international funds but some diversified equity schemes also. These schemes invest a part of their portfolio in international stocks. Some notable examples are Parag Parikh Flexi Cap Fund, SBI Focussed Equity Fund, Axis Growth Opportunities Fund, among others.
There are around 65 international mutual funds in the Indian market at the moment and all of these have to put their inflows on hold after the industry breached the $7 billion mark stipulated by SEBI. Apart from these many sectoral, thematic and diversified equity schemes invest in international stocks. There are large numbers of ETFs also which have international stocks in their portfolio. Here is a look at how these schemes have performed in the past:
The AUM of the international fund category has grown from Rs 3,688 crore in December 2019 to Rs 39,658 crore as of December 2021. This huge increase has been because of the increased number of international funds and ETFs launched by the fund houses. These schemes not only invest in the US market now, but these are also targeted at Japan, Brazil, emerging markets and Europe among others. The higher returns and new investment opportunities in the international market have attracted Indian investors and the increased awareness has led to such big numbers in this category.
“India’s weight in MSCI All Country World Index and MSCI Emerging Markets Index is less than 3% and around 12.5% respectively. This means there is a very big investable market outside India. In this interconnected, globalized, innovative and technology-oriented world the time has come for one to have some exposure overseas from a diversification point of view. Thus, If someone is specifically looking to invest in the international markets then they should not compromise and invest in any domestic funds. I recommend new investors to have patients and wait till the limit is extended. This applies for existing investors as well,” says Rushabh Desai, Founder, Rupee with Rushabh, an AMFI registered mutual fund distribution firm based in Mumbai.
Since there is no way investors can switch to some other scheme to have international exposure, mutual fund advisors believe that they shouldn’t do anything at the moment and continue to stay where they are. Most fund managers and advisors believe that the restriction is only temporary. Many fund houses have sent communications to their investors to stay put. If you are a new investor who wants to invest in international funds, the only thing you can do is wait.
“The $ 7 billion limit was set in April of 2008 when the Assets Under Management of the Mutual Funds in India were around Rs 5 lakh crores and India’s foreign exchange reserves were around $ 309 billion. Today the same numbers are around Rs 37 lakh crores and $ 634 billion. Conditions are very conducive for RBI to increase the limits. It is just that the pace of inflows into schemes investing overseas has been brisk and the prospect of a breach in the aforesaid investment limit appeared increasingly likely. Hence, the Regulators sought to intervene pre-emptively,” said Rajeev Thakkar, CIO, PPFAS Mutual Fund in a note to investors.