SEBI Directs Mutual Funds to Halt Inflows into Overseas ETFs Amid Investment Limitations

The Securities and Exchange Board of India (SEBI) has instructed the Association of Mutual Funds of India (AMFI) to halt the acceptance of inflows into funds investing in overseas ETFs. This directive comes after the mutual fund industry reached its $7 billion limit for investing in foreign stocks and funds over two years ago, prompting a suspension of inflows into such overseas mutual funds.

Since hitting the $7 billion threshold in January 2022, SEBI had previously directed fund houses to refrain from further investments in overseas securities. Presently, the cap for investing in overseas ETFs stands at $1 billion and is nearing exhaustion.

There are two categories of mutual fund schemes investing in overseas markets: those directly purchasing foreign shares (with a $7 billion limit) and those, typically Fund of Funds, buying units of ETFs abroad (with a $1 billion limit). Fund houses are now required to cease accepting investments in these Fund of Funds or ETFs investing in overseas ETFs.

Currently, there are more than 75 mutual fund schemes in India investing overseas, with the previous $7 billion cap still in effect for other overseas funds.

In 2023, SEBI allowed fund houses to resume investing in foreign stocks if their assets under management had declined due to corrections in overseas markets, leading to a reduction in their assets under management.

The acceptance of investments by overseas mutual funds fluctuates based on their proximity to upper investment limits for overseas investments. The flow of funds into such schemes has been variable thus far.

On February 26, four funds from Nippon India Mutual Fund – Nippon India US Equity Opportunities, Nippon India Japan Equity, Nippon India Taiwan Equity, and Nippon India ETF Hang Seng BeES – ceased taking investments, with existing registered Systematic Investment Plans (SIPs) and Systematic Transfer Plans (STPs) continuing.

Notably, the Fund of Funds and ETF variants of the US-focused Mirae Asset NYSE FANG were the top-performing funds in 2023, delivering approximately 100 percent returns during the year.

Currently, most global funds, except ETFs, are open to fresh investments, subject to changes based on available headroom for fund houses.

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