India Halts New International Fund SIPs Due to Investment Limits

Indian investors are now unable to start fresh Systematic Investment Plans (SIPs) in international mutual funds. This follows the closure of the last open fund, Baroda BNP Paribas Aqua FoF, to new investments on July 23.

The mutual fund industry has faced a progressive shutdown of international offerings for new SIPs. By July 10, eleven international funds had already ceased or were preparing to cease new registrations, impacting a significant portion of the market.

This included three funds from PGIM, two from Franklin Templeton, and six from Edelweiss. These closures left only Baroda BNP Paribas Aqua FoF accessible until its own recent cessation of new investments.

Understanding Overseas Investment Restrictions

The primary reason for these widespread closures stems from India’s stringent overseas investment limits. The mutual fund industry operates under a combined cap for its foreign exposures, mandated by regulatory bodies.

These limits are precisely defined for different investment types. There is a combined cap of $7 billion for direct investments in foreign securities, alongside an additional $1 billion specifically designated for overseas Exchange Traded Funds (ETFs).

In January 2022, the industry collectively exceeded the $7 billion foreign securities limit, prompting immediate regulatory intervention. The Securities and Exchange Board of India (SEBI) responded by freezing each fund house’s overseas investment capacity.

This freeze was implemented at the level recorded on February 1, 2022. Consequently, fund houses cannot expand their overseas exposure beyond this point, even in response to increased investor demand.

Fund reopenings are conditional upon specific market dynamics. Funds might reopen if their overseas holdings decrease, which could occur due to market downturns, currency fluctuations, or existing investor redemptions, though no definite timeline exists.

Navigating Alternatives for Global Exposure

For investors still seeking international market exposure, two primary alternatives exist, each presenting its own set of considerations and complexities. Understanding these options is crucial in the current restrictive environment.

One option involves Indian-listed international ETFs, which track foreign markets and trade on domestic stock exchanges. Notable examples include Mirae Asset Hang Seng TECH ETF, Motilal Oswal Nasdaq Q50 ETF, and Nippon India ETF Hang Seng BeES.

However, these ETFs present their own challenges in terms of accessibility and pricing. They are currently trading at substantial premiums, with some reaching as high as 20% above their Net Asset Value (NAV).

This premium developed because these ETFs also hit their overseas investment limits in April 2024. This created a situation of restricted supply against persistent investor demand, driving market prices significantly above their intrinsic value.

Another route is direct overseas investing, facilitated by the Liberalised Remittance Scheme (LRS). This scheme permits individuals to remit funds abroad to construct an independent overseas portfolio, bypassing mutual fund specific limits entirely.

Utilizing the LRS route, however, entails greater responsibility for the individual investor. This includes the direct selection and management of investments, alongside ensuring full compliance with relevant tax regulations, which requires diligent attention.

Ultimately, investors are advised to approach the situation with patience. The availability of international funds remains contingent on evolving overseas investment limits and broader market conditions, suggesting a need for a long-term perspective.