The recent directive from the Securities and Exchange Board of India (SEBI) concerning mutual fund schemes with investments in Exchange-Traded Funds (ETFs) listed on foreign exchanges is particularly significant, noted Chirag Mehta, Chief Investment Officer at Quantum AMC, on Saturday. He emphasised that this development arrives at a pivotal juncture for the Mutual Fund industry as it approaches the investment limit of $1 billion prescribed by the regulator for this category, reported the news agency PTI.
Mehta drew parallels to a past scenario when the industry encountered a similar situation upon reaching the $7 billion foreign investment limit. At that time, flows in funds investing in stocks overseas had to be suspended. He speculated that such limits were likely instituted to curtail the outflow of foreign currency within a specific threshold, aiming to mitigate the impact on the balance of payments and, consequently, on the Indian currency.
“The result will be that these mutual fund schemes will have to limit their inflows. It's been a long time since these limits were set and are probably due for enhancement,” he said.
Angel One reports that the Association of Mutual Funds India (AMFI) has been directed by the SEBI to halt new investments in ETFs directing funds to overseas markets. This directive has been issued due to the imminent breach of the upper limit for ETFs established by the Reserve Bank of India (RBI) for overseas investments, which presently stands at $1 billion out of a total industry-wide limit of $7 billion.
Starting April 1, 2024, there will be a mandatory suspension of new investments for funds of funds (FoFs) engaged in investing in ETFs listed on international markets. This decision aligns with regulatory guidelines established to ensure compliance with the Reserve Bank of India's specified limits concerning foreign investments by mutual funds. These measures, as outlined by Angel One, are aimed at upholding adherence to the prescribed regulatory framework.