SBI Funds Management, the country’s largest fund house with AUM of ₹8.51-lakh crore, has approached the RBI to enhance the overseas investment limit on the back of growing investors interest and India’s comfortable forex position.
The fund house representation comes close on the similar appeal by the Association of Mutual Funds in India. In January 2022, SEBI had frozen overseas-focused mutual fund schemes investment as it was close to the ceiling.
Subsequently, following the global market crash, SEBI allowed fund house to accept investment in overseas fund but within the individual limit set for each fund house.
$7-billion cap
Under the current RBI rules, domestic mutual funds can invest up to $7 billion in overseas stocks and an additional $1 billion in exchange-traded funds. The limit for the industry was set in 2007-08 and has not been revised despite the economic growth and massive increase in investor appetite over the years.
The country’s forex reserve was at about $300 billion when the limit of $7 billion was finalised, but now it has more than doubled to $600 billion, said a mutual fund CEO.
Ideally, RBI should fix the industry’s limit at 3-5 per cent of forex reserves, rather than putting a finite number as equity investment culture among the common man is fast catching up with the rising per capita income and investors become more savvy, he added.
Skewed towards LRS
With RBI capping MF overseas investment, savvy investors are availing the avenue under the liberalised remittance scheme (LRS) that allows resident individuals, including minors, to remit up to $2,50,000 in current or capital account transactions every fiscal.
Interestingly, the RBI has been increasing the forex remittance limit consistently under LRS which is being used by high net-worth investors and family offices, the CEO said. The scheme was introduced with a limit of $25,000 in 2004.
Unlike LRS, overseas investments made through mutual funds can be traced back easily and redeemed only in rupee, he added.
With restrictions on fresh flows, the industry has registered a net outflow of ₹2,707 crore from investing overseas in last three quarters while the inflow was at ₹272 crore in the March quarter last year.
Despite outflow, the asset under management was up 9 per cent at ₹24,064 crore in December against ₹22,138 crore last January.