SEBI asks mutual funds to stop accepting inflows in ETFs investing overseas

The Securities and Exchange Board of India (SEBI) has asked the Association of Mutual Funds of India (AMFI) to stop accepting inflows into funds that invest in overseas ETFs.

This move comes a little over two years after the mutual fund industry exhausted its $7 billion limit to invest in overseas stocks and funds; a move that had such overseas mutual funds stop accepting money.

The upper limit available to MFs to invest in overseas securities is $7 billion. Since this limit was reached in January 2022, SEBI had asked fund houses to stop investing overseas.

Now, the limit to invest in overseas ETFs is $1 billion and is about to be breached. Moneycontrol has reviewed a copy of the letter that the SEBI sent to AMFI, the industry body, on March 20.

To be sure, there are two types of mutual fund schemes that invest in overseas markets. One type of MF schemes directly buys shares abroad (up to a limit of $7 billion). The other type of fund- typically a Fund of Fund buys units of ETFs abroad (up to a limit of $1 billion).

Fund houses accepting money in these Fund of Funds or ETFs that invest money in overseas ETFs will have to put a stop to it.

There are 77 mutual fund schemes in India that invest overseas. The earlier cap imposed on other overseas funds of $7 billion still continues.

SEBI had, however, in 2023 given a concession that fund houses could invest in foreign stocks again if their assets under management had fallen due to correction in overseas market, which would have led their assets under management to fall.

Overseas mutual funds stop and start accepting money, depending on how close they are to their upper limits when it comes to investing your money overseas. The money flow into such schemes has been a mixed bag so far.

On February 26, four funds of Nippon India Mutual Fund – Nippon India US Equity Opportunities, Nippon India Japan Equity, Nippon India Taiwan Equity, and Nippon India ETF Hang Seng BeES – stopped taking investments. Nippon India MF clarified that existing registered Systematic Investment Plans (SIPs) and Systematic Transfer Plans (STPs) will continue.

Notably, the FoF and ETF variants of US-oriented Mirae Asset NYSE FANG were the top-performing funds of the calendar year 2023 as they delivered around 100 percent returns during the year.

At this point, most global funds, apart from ETFs, are accepting fresh investments, which can change at any time depending on the headroom available to the fund houses.