SEBI Restricts International Investments: Explained

If you have been investing in fund of funds (FoF) that invest in foreign-listed Exchange Traded Funds (ETFs), you need to read on. The Securities and Exchange Board of India (SEBI) has asked such FoFs to stop taking contributions towards investments in overseas ETFs from the beginning of the financial year.

FoF Restriction Imposed by SEBI

The Reserve Bank of India had set a limit of $1 billion on total investments that can be made on overseas ETFs. The Association of Mutual Funds in India (AMFI) recently confirmed that 95% of this threshold has been hit. The SEBI, therefore, pulled the plug on these ETF feeder funds in a communication to AMFI. AMFI passed on this directive to fund houses soon after.

Fund houses have approached the RBI on several occasions to request an increase in the threshold, but the RBI has not yet budged from such requests. It is noteworthy that the combined direct investment limit on foreign stocks stood at $7 billion in February 2022. SEBI had imposed a similar restriction in January 2022 as investments closed in on the threshold. The body allowed investments only for the gaps created by redemptions. Currently, mutual funds are sitting at 84% of this $7 billion limit.

Can You Still Invest Overseas?

The short answer is yes, provided it is not through the FoF/foreign ETF route. Mutual funds can continue to invest in overseas securities through the non-ETF route as long as the $7 billion limit is not touched. Looking at the US market rally in recent months, it may not be long before we reach the threshold.

The individual RBI limit on foreign exchange expenses is set at $250,000 per person. However, when it comes to mutual fund investments, the cumulative national threshold applies. For a country of 1.4 billion, this amounts to barely $5.7 per Indian citizen. The irony is that people continue to spend a lot more than that in foreign exchange on gold purchases and foreign travel. Indian investors interested in overseas stocks can still invest in mutual funds that take the non- ETF route. Besides, they can open an international trading account and invest in overseas stocks directly. International trading account services are provided by all leading Indian brokerage houses as well as by international brokerages. The RBI’s liberalised remittance scheme limit of $250,000 will apply to such investments.

Why Overseas Investments Is Lucrative?

Overseas investment, particularly in developed economies, normally cannot match the growth delivered by emerging economies like India. Nevertheless, overseas investments offer an opportunity to ride rallies that happen in foreign markets. A recent example of this is the rally in US technology stocks. Nasdaq 100 gained 44% during one year, with stocks like Nvidia, Microsoft, Alphabet (Google) and Amazon outperforming. Nvidia rose by an astonishing 249% during this period, while Amazon’s stock price surged by 78%. Even Microsoft saw a 56% increase while Alphabet stocks went up by 40%. Indian fund houses like Axis, Motilal Oswal, Mirae Asset and ICICI have invested in around 1.7 lakh Nvidia shares. US market enthusiasts have already garnered a windfall gain by investing in these opportunities.

Final Thoughts on Overseas Investing

While SEBI has closed the ETF route, you still have the non-ETF mutual fund route as well as the direct investment option open. You can follow the exciting overseas markets, mark your preferred exposure and diversify your investment portfolio further. from-india-12340621.html etfs-sebi-to-mfs/articleshow/108690639.cms


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