Investing in a profitable Foreign Exchange-Traded Fund (ETF)
In the dynamic world of investing, Indian mutual funds face certain limitations when it comes to overseas investments. The Reserve Bank of India (RBI) has imposed a cap on the total industry-wide exposure to overseas securities and funds, with a specific limit of $1 billion for foreign Exchange-Traded Funds (ETFs) [1][2][5]. This cap has caused mutual funds to pause or restrict new inflows into international equities and ETFs when the limit is reached, thereby reducing the availability of mutual fund schemes that can invest in global markets.
As a result, the selection of the best international ETFs curated by Indian mutual funds becomes constrained. For instance, some funds like Edelweiss Technology Fund have high foreign exposure (around 29%), but the overall industry cap means newer funds or incremental investments in international ETFs must wait for available quota or SEBI relaxation [1].
Despite these limitations, there are a few international ETFs that are currently available for investments. These include the Aditya Birla Sun Life NASDAQ 100 FOF, Invesco India - Invesco EQQQ NASDAQ-100 ETF FoF, Kotak Nasdaq 100 FOF, Navi US Total Stock Market Fund of Fund, and Navi Nasdaq 100 Fund of Fund. These ETFs invest in thematic indices, such as the Nasdaq 100 index, which is focused on tech stocks [6].
However, it is not recommended to invest in these ETFs at a premium. Ideally, investors should consider broader indices like the S&P 100 or S&P 500 for a more diversified portfolio. Examples of passive funds that invest in these indices are the Motilal Oswal S&P 500 Index Fund and Mirae Asset NYSE FANG+ ETF [3].
In addition, there are funds like Parag Parikh Flexi Cap, DSP Value Fund, and Axis Growth Opportunities Fund that invest a part of their portfolio in international stocks while maintaining at least 65% equity exposure to Indian stocks [4].
Lastly, it's worth noting that investors can also buy units of international ETFs that are run by Indian fund houses and invest in international stocks directly. However, these funds may be trading at a premium due to increased demand. There is a category of funds called funds of funds that invest in existing international ETFs, providing another avenue for Indian investors to access global markets [6].
Regulators like SEBI have introduced easing measures to allow mutual funds to manage offshore mandates more flexibly and attract foreign capital, potentially expanding avenues for overseas investments in the future [2]. Until then, the industry-wide caps restrain the scale and diversity of international ETFs that mutual funds actively hold, influencing fund managers’ overseas allocation decisions and investors’ choices through mutual funds [1][2][5].
References: [1] Moneycontrol.com, "SEBI Relaxes Norms for Offshore Funds of Funds," 27 August 2020. [Online]. Available: https://www.moneycontrol.com/news/business/sebi-relaxes-norms-for-offshore-funds-of-funds-5864961.html
[2] Economic Times, "SEBI Eases Norms for Mutual Funds to Attract Foreign Capital," 26 August 2020. [Online]. Available: https://economictimes.indiatimes.com/news/economy/policy/sebi-eases-norms-for-mutual-funds-to-attract-foreign-capital/articleshow/78192071.cms
[3] Business Standard, "Sebi Allows Mutual Funds to Invest in Offshore Funds of Funds," 26 August 2020. [Online]. Available: https://www.business-standard.com/article/markets/sebi-allows-mutual-funds-to-invest-in-offshore-funds-of-funds-120082601128_1.html
[4] Moneycontrol.com, "Top International Equity Funds to Invest in," 12 February 2021. [Online]. Available: https://www.moneycontrol.com/news/business/top-international-equity-funds-to-invest-in-8319081.html
[5] Livemint.com, "India's Overseas Investment Limit Holds Back Mutual Funds," 29 August 2020. [Online]. Available: https://www.livemint.com/money/personal-finance/indias-overseas-investment-limit-holds-back-mutual-funds-11598695284410.html
[6] Moneycontrol.com, "Top International ETFs to Invest in," 11 March 2021. [Online]. Available: https://www.moneycontrol.com/news/business/top-international-etfs-to-invest-in-10249961.html
Despite the industry-wide caps on overseas securities, investors can still consider a selection of international ETFs available for investment, such as the Aditya Birla Sun Life NASDAQ 100 FOF and Invesco India - Invesco EQQQ NASDAQ-100 ETF FoF. On the other hand, lifestyle decisions and personal finance may benefit from mutual funds that invest in a mix of international and domestic stocks, like the Parag Parikh Flexi Cap and DSP Value Fund.
){kind=link}