The Securities and Exchange Board of India (Sebi) on Friday proposed allowing investments by mutual fund houses in overseas fund of funds (FoF) that hold up to 20% of their corpus in Indian securities.
“There appears to be merit in considering to allow investment by Indian mutual funds in such overseas funds that have limited exposure to Indian securities,” Sebi said in a consultation paper on its website, inviting public comments on its proposal by June 7.
A ‘fund of fund’ investing in an overseas product where the Indian exposure exceeds 20% will be given six months to monitor the underlying fund for any rebalancing. During this period, the Indian mutual fund cannot make fresh investments in the foreign fund and may resume investment only when the India exposure falls below the 20% limit.
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The market regulator hopes to address issues such as the alignment of fund labels and cost efficiency for the end investors, it said. “Putting adequate safeguards for such investments would keep Indian FoFs true to their label as well as enable investors to take desired exposure in overseas securities,” Sebi said.
“If an overseas Fund of Funds (FoFs) offered by an Indian mutual fund invests in overseas MF/UTs with a significant allocation to Indian securities, it may not be true to the fund’s label, and may not reflect the overall purpose of investing in such FoFs,” Sebi said. Further, direct investment in Indian securities by an investor would be cost effective rather than investing in Indian securities through an overseas FoF offered by Indian mutual funds, it noted.
The move was encouraged by the increasing weightage of Indian securities in international indices, exchange traded funds (ETFs), mutual funds, and unit trusts on the back of “strong economic growth prospects of India”, and the need to diversifing Indian mutual fund portfolios, Sebi said.
As of April 30, 2024, the MSCI Emerging Markets Index has a little over 18% weight to Indian securities. Similarly, JP Morgan’s Emerging Markets Opportunities Fund’ holds about 15% in Indian investments, according to its latest factsheet as on March 31, 2024.
Currently, there was ambiguity regarding investments in such FoFs that invest a part of their funds in Indian securities, which deterred mutual funds from investing in those overseas products that invest in a basket of countries, which may include India, Sebi noted.
However, while investing in such overseas products, mutual funds will have to ensure that the contribution of all investors of the overseas fund is pooled into a single investment vehicle, without the presence of any side-vehicles; such overseas product should be managed by an independent investment manager and such overseas fucnd should disclose their portfolios periodically to the public to maintain transparency.
Additionally, Sebi suggested that there should not be any advisory agreements between Indian mutual funds and underlying overseas fund, in a bid to prevent conflict of interest and avoid any undue advantage.
