SEBI Halts New Inflows into Overseas ETFs for Mutual Funds

SEBI halts inflows into overseas ETFs: Navigating mutual fund industry stability

The  Securities and Exchange Board of India (SEBI) recently directed the Association of Mutual Funds in India (AMFI) to halt inflows into funds investing in overseas Exchange-Traded Funds (ETFs). This move comes as a result of reaching the US$7 billion limit for investing in foreign stocks and funds, a cap that was hit over two years ago. Since January 2022, SEBI had instructed fund houses to refrain from further investments in overseas securities. The current cap for investing in overseas ETFs stands at US$1 billion and is nearing exhaustion. Fund houses are now required to cease accepting investments in Fund of Funds or ETFs investing in overseas ETFs.

This development has significant implications for the Indian mutual fund industry, particularly for those schemes with exposure to international markets. With over 75 mutual fund schemes in India investing overseas, the previous US$7 billion cap still being in effect for other overseas funds, the directive underscores the need for stricter adherence to regulatory limits.

SEBI's decision reflects its efforts to manage capital outflows and ensure prudential investment practices within the mutual fund industry. By imposing limits on overseas investments, SEBI aims to mitigate risks associated with excessive exposure to foreign markets and maintain stability within the domestic financial system.

In 2023, SEBI had temporarily allowed fund houses to resume investing in foreign stocks if their assets under management had declined due to corrections in overseas markets. However, the acceptance of investments by overseas mutual funds fluctuates based on their proximity to upper investment limits, as evidenced by the recent actions taken by Nippon India Mutual Fund.

On February 26, four funds from Nippon India Mutual Fund ceased taking investments, although existing Systematic Investment Plans (SIPs) and Systematic Transfer Plans (STPs) continue unaffected. This decision indicates a proactive approach by fund houses to comply with regulatory directives and manage investor expectations.

Despite the regulatory constraints, certain overseas-focused mutual funds have delivered impressive performances. Notably, the Fund of Funds and ETF variants of the US-focused Mirae Asset NYSE FANG emerged as top performers in 2023, delivering approximately 100 percent returns during the year. Such successes underscore the potential for diversification and growth offered by international markets, albeit within the confines of regulatory limits.

Looking ahead, fund houses will need to navigate the evolving regulatory landscape while balancing investor demand for exposure to global markets. This may entail exploring alternative investment avenues, optimizing existing strategies, and enhancing risk management frameworks to adapt to changing market dynamics.

In conclusion, SEBI's directive to halt inflows into funds investing in overseas ETFs reflects its commitment to maintaining regulatory oversight and fostering responsible investment practices within the Indian mutual fund industry. While posing challenges for fund houses, the regulatory measures aim to safeguard investor interests and ensure the stability of the financial system amidst evolving market conditions.