So far, Indian mutual funds were restricted to operating and investing only in the domestic market. But this is changing rapidly. New government policies and guidelines are increasingly opening up overseas markets to not only Indian mutual funds but also to Resident Indian investors. Lets examine the relaxations offered to mutual funds first and then the individual investor.
Indian mutual funds have been permitted to invest in securities listed above. At the same time the Securities and Exchange Board of India (SEBI) has put in some prudential norms and rules in place such that investors' funds are deployed in a systematic and methodological manner that mitigates the risk that foreign and relatively unfamiliar markets bring in their wake.
Therefore, it has been specified that the aggregate ceiling for the mutual fund industry to invest in overseas equity, ADRs/GDRs, rated debt securities etc. should not exceed US$ 3 billion.
Further, to preclude any one mutual fund from assuming too much risk, it has also been provided that within this overall limit of US$3 billion, there will be a sub-ceiling for individual mutual funds. Overseas investments should not exceed 10% of the net assets managed by any one mutual fund, subject to a maximum of US$150 million per mutual fund.
Furthermore, considering the fast growing popularity of Exchange Traded Funds (ETFs) a limited number of qualified Indian mutual funds are permitted to invest, cumulatively up to $ 1 billion, in overseas exchange traded funds.
To be eligible to invest in overseas ETFs, either of the two conditions need to be satisfied:
i. The Mutual Fund shall be in existence for a minimum period of 10 years as on July 31, 2006 and managing schemes.
ii. The Mutual Fund or its Sponsors shall have experience, to be certified by the Trustees, of investing in foreign securities, and an appropriate disclosure regarding the nature of experience shall be made in the offer document.
Further, a ceiling of US $50 million per mutual fund is applicable for investments in overseas ETFs. Stringent disclosure requirements in offer documents and annual reports have been specified for such overseas investments.
This just goes to prove that not only is the Indian mutual fund industry spreading its wings in hitherto untapped markets, this activity is being closely regulated and monitored by the regulator so that at the end of the day, the investors' funds are protected and not subject to the undertaking of unwarranted risks.
Overseas Investments: Resident Individuals
In a circular dated December 20th, 2006, a Resident investor has been permitted to invest up to US$50,000 per calendar year in overseas investments. Also there was a restriction earlier that even if one does intend making investments in stocks listed overseas, the eligible companies were only those which had a shareholding of at least 10 per cent in an Indian company listed on a stock exchange in India e.g. one could buy Unilever as it holds more than 10% in Hindustan Lever Ltd. (listed in India) but not say Google. This requirement too has been dropped.
Though its been some time since the facility of overseas investments been introduced, not many products were on offer. The reason for this was that soliciting of deposits etc. by entities which did not have an operational presence in India, gave rise to supervisory concerns. Therefore, all banks, both Indian and foreign, including those not having an operational presence in India were needed to seek prior approval from RBI for the schemes being marketed by them.
Now Budget 2007 seeks to converge these regulations that allow investors and mutual funds to invest in overseas securities.
At the end of the day, all said and done, in spite of all these developments, the fact remains that the Indian mutual fund industry is still nascent. Trading in derivatives, ETFs and Gold Funds are just some of the recently introduced innovations. As you read this, guidelines that will allow mutual funds to short-sell thereby increasing the potential of return (albeit at a higher risk) and so also investment in real estate in the safest and most transparent possible way are on the anvil.
Mutual Funds provide the most optimum mix of Return, Risk, Liquidity and Tax Efficiency. Of course, provided they are used well. If you had a personal Portfolio Manager, he would have told you that equities have known to earn the highest return in any asset class over the long-term. The operative words being long-term.
Well, your mutual fund is your personal portfolio manager. Moreover, it is more transparent and tax efficient than a normally appointed portfolio manager. Allow him to do his thing. Invest well and stay for the long-term. Frequently getting in and out only hampers the journey….and when it comes to successful investing, believe me, it is the journey that is more enjoyable than the final destination.
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