ETF: As $1b limit nears, MFs told to suspend overseas ETF inflows

Mumbai: India’s capital markets regulator has ordered local mutual fund managers to stop accepting money in plans that invest in overseas exchange traded funds (ETFs) as a $1-billion cumulative sectoral limit for such investments is close to being breached. The Reserve Bank of India (RBI) regulates the fund inflows and outflows involving locally pooled investments in overseas financial assets. Currently, there is an overall industry level limit of $7 billion for investments into overseas mutual funds, and an additional $1-billion limit for foreign ETFs.

The Securities and Exchange Board of India (Sebi) has asked the Association of Mutual Funds in India (AMFI) to direct fund houses to stop accepting money in the relevant ETF-focused plans. From April 1, these fund managers will not accept lumpsum money in these plans, while existing systematic investment plans will be paused. Fund houses can continue to accept money in plans that invest in overseas securities other than ETFs, which have a separate limit of $7 billion.

ET has seen a copy of the letter sent by the AMFI to individual asset managers. Mails sent to AMFI and Sebi remained unanswered until the publication of this report.

Indian investors access overseas financial assets generally through the fund of funds route, although there are some niche funds offered through the ETF route. Mirae Asset Global X Artificial Intelligence and Technology ETF, Mirae Asset Global Electric and Autonomous Vehicles ETF, Motilal Oswal Developed Market Ex US ETFs and Invesco India-Invesco EQQQ Nasdaq 100 ETF are some niche funds that invest in overseas ETFs. The industry had first reached the $7-billion limit in February 2022. Back then, MFs were asked to stop accepting fresh flows into such investment plans.

However, as the global markets witnessed a sharp correction after the Federal Reserve began stepping up rates, investors booked profits and that led to a reduction in valuation of international stocks.

With no indexation benefits on capital gains available on international financial assets, fresh investor demand slowed. This led to the cumulative investments made by international MF plans slide below the overall limits of $7 billion.

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