June 30, 2022
Mutual Funds provide a great option to diversify the portfolio of an investor by way of investing in International Funds. The mutual funds offer mainly three types of schemes investing in overseas market –
Schemes investing in overseas stocks/ Mutual Funds Units
These schemes allocate all their funds in overseas stocks/ mutual funds Units. SEBI has set an overall limit of $7 Billion for the mutual funds to invest in Overseas stocks and mutual funds Units.
Schemes having a portfolio mix of domestic and overseas equities
These schemes invest some portion of their AUM in domestic equities and some portion in overseas equities.
Schemes investing in Exchange Traded Funds (ETFs) listed overseas
Some schemes invest in overseas by way of subscribing to ETFs listed there. Currently Mutual funds have a separate limit of $1 Billion to invest in overseas ETFs.
On 31st January 2022, SEBI restricted Mutual fund houses to put any additional investment in overseas equities, as the limit of $7 Billion was likely to be exhausted. As a result, Mutual Fund houses stopped accepting fresh investments in the schemes investing in overseas stocks/ mutual fund units.
The schemes having a mix allocation in domestic and overseas equities remained open for subscription as they could continue to put the fresh inflows in domestic stocks.
The separate limit of $1 Billion for ETFs is not exhausted. Hence the schemes investing in overseas ETFs also continued to accept inflows and invest in ETFs.
Lift of ban on accepting fresh inflows in international Mutual Funds -
On 21st June 2022, SEBI has allowed mutual funds to again invest in overseas stocks/ mutual fund units but within the aggregate limit of $7 Billion. Therefore, fund houses have reopened the schemes for fresh inflows, but they cannot accept money beyond the threshold they hit on February 1, 2022.
There has been a sharp correction in Global equity markets from February till now due to various reasons like ongoing interest rate hikes to control the rising inflation, Ukraine – Russia War, etc. It made investors to redeem their units out of fear, and hence mutual fund houses sold their overseas holdings to pay off the investors. It created a headroom for the mutual fund houses to utilise the limit available again up to the aggregate of $7 Billion.
How is this deep correction an opportunity for the investors?
Investing in International mutual funds is itself beneficial for the investors as it provides a room for diversification in the portfolio and allows investors to profit from rupee depreciation.
International mutual funds have allocations in large overseas companies like Apple, Amazon, Netflix, Google, etc., which have solid businesses but have corrected now due to external reasons. So, investors are getting a golden opportunity to invest in these type of companies at a substantial discount.
Fall In some of the international funds are as follows –
|Scheme Name||% down from Peak NAV|
|Edelweiss US Technology Equity FoF||-42.79%|
|PGIM India Emerging Markets Equity Fund||-41.19%|
|PGIM India Global Equity Opportunities Fund||-40.27%|
|Edelweiss greater china equity off-shore Fund||-37.29%|
What should the investors do?
The investors who are already invested in the international mutual funds were not able to infuse any fresh money despite such steep correction in the NAVs of the funds since February.
Now, when these funds are re-opened for fresh subscriptions, they can average cost of their international investments.
The investors who are new to the international funds, can invest some lumpsum money in these funds.
The AMC at its discretion reserves the right to suspend the subscriptions as and when it is close to the headroom limit which was available as of February 1, 2022. Hence, investors who wants to avail this opportunity should take decision timely.
As this lift of ban on fresh subscriptions may be temporary, investors who wishes to participate in overseas equities via SIP mode, can start SIP in schemes investing in ETFs like Kotak Nasdaq 100 FoF, Aditya Birla SL Nasdaq 100 FoF, DSP Global Innovation FoF, etc.
As the limit of ETFs is still not exhausted, these schemes can keep investing in overseas ETFs for a longer time.
Investment in the schemes having mix of domestic and international exposure have remained open throughout the period. So, any investor who does not want much allocation in overseas equities but wants to participate in it, can invest via lumpsum as well as SIP mode into these schemes.
Examples of such schemes are Axis Growth opportunities Fund, Parag Parikh Flexi Cap fund, Kotak Pioneer fund, etc.
Currently, Global Equities market is experiencing sharp fall due to various macro factors. But these factors do not make the companies fundamentally weak. In fact, due to this sharp correction, sound companies are available at attractive valuations which offers a good opportunity for the investors who wants to have some global exposure in their portfolios.
The acceptance of fresh inflows in international funds can be temporary due to the limited headroom available with the fund houses. So, a good window is open for existing investors to average their investments and for new investors to get some exposure to international equities.
Wishing you prosperity with peace!
Research Analyst, InvestGuru