MFs eye GIFT City route to cross foreign investment limit barrier

Plan products to leverage individual LRS cap for global exposure

Even as hopes for an extension in the overseas limit for mutual fund (MF) investments dwindle, asset management companies (AMCs) are planning product launches in Gujarat International Finance Tec-City (GIFT City) to facilitate retail investments in international markets.

The MF industry reached its $7-billion limit for overseas investments a year ago. Since then, many funds have remained closed for fresh inflows.

“We don’t see any relaxation in the near term on overseas investment limits. However, we have set up an office in GIFT City through which we are exploring products for investors to use their individual liberalised remittance scheme (LRS) limits to seek international exposure,” said A Balasubramanian, managing director and chief executive officer, Aditya Birla Sun Life AMC.

These products aim at leveraging the $250,000 limit provided every financial year under LRS of the Reserve Bank of India. All Indian citizens are allowed to remit amounts up to this limit for foreign transactions.

“We have secured the licence to establish an office in GIFT City. Currently, we are in talks with legal teams and consultants to explore products that will facilitate overseas investments for retail investors. We hope to have something calibrated by the end of this year,” said another senior executive from a leading AMC.

Industry experts said the products planned are along the lines of alternative investment funds (AIFs) available in the onshore market. Many AIFs have diversification in international equities. However, the minimum investment limit for individuals in AIF is Rs 1 crore, making it inaccessible to retail investors.

Following correction in international markets, the Securities and Exchange Board of India (Sebi) in June 2022 permitted MFs to again invest in foreign stocks, provided they had the headroom within the prescribed limit.

Over the years, many funds — which earlier had as high as 30 per cent portfolio weighting in companies listed abroad — have now come down by more than half. Inflows into these funds are now being allocated to domestic equities.

At present, only overseas exchange-traded funds (ETFs) or fund of funds (FoFs) investing in ETFs abroad are accepting inflows from investors. Sebi provides an additional $1 billion limit for investments in overseas ETFs.

According to Value Research data, there are 70 MFs, including FoFs and ETFs, investing overseas, adding up to an asset under management value of Rs 38,284 crore. However, a majority of these funds have given negative returns in the past year due to sell-off in markets such as the US, China and the technology space.

Many believe last year’s correction provides a good investment opportunity.

The plans by several AMCs to launch international exposure funds are at a complete standstill due to a freeze on investment limit.

There has been unceasing demand from the Association of Mutual Funds in India to increase the limit.

“The $7-billion limit is low, given how the industry has grown over the past few years. While there is recognition of this, the past 12 months have been challenging in terms of foreign flows, energy prices, currency value, and foreign exchange reserves. There has to be a more opportune time to relax it (limit),” said another industry player.

Experts believe that the GIFT City route does open up many avenues for the Rs 40-trillion MF industry, although it may require a lot of groundwork and investor awareness.

AMCs are also planning to leverage the GIFT City route to fetch investments from non-resident Indians (NRIs) into Indian markets.

“The proposed AMC branch in GIFT City will manage retail and venture capital funds registered there, which will raise funds from NRIs and non-resident investors, manage third-party mandates, and sub-manage existing overseas funds investing in India,” said a spokesperson for Mirae Asset MF.

BREAKING DOWN WALLS

• AMCs exploring products to give retail investors access to foreign equities 
• Plan to leverage individual LRS limit by offering products through GIFT City
• Several AMCs initiate action in this round 
• Experts see no near-term relaxation in the overseas investment limit of $7 billion
• The industry reached the overseas limit a year back 
• Many AMCs’ plans for international funds stuck