International Funds to Allow investments Again. But NOT for Long.

A few months back (February 2022), the Indian mutual funds had to stop international investments as the MF industry had reached its RBI/SEBI specified limit of $7 billion available to invest in international direct stocks. The international funds had stopped taking investments altogether in most cases back then.

Now SEBI has allowed AMCs to resume international investments. But there is a caveat – all the AMCs can invest in overseas stocks now, but they can invest only to the extent of their international AUM as of 1st February 2022.

It has now also been clarified by SEBI that headroom available is only to the extent of redemptions in the schemes and not to the extent of the drop in market value of the portfolio stocks.

Do note that the original $7 Billion limit has not been increased till now.

How this will work is something like this – Suppose the international AUM till the cut-off date was Rs 1000 crore. Now after the recent correction in international markets (like S&P500 and Nasdaq 100), say AUM has fallen to Rs 800 crore. So, the AMC now has a leeway to invest a fresh amount of up to Rs 200 Cr (A difference of Rs 1000 Cr and Rs 800 Cr).

Since different AMCs have different international AUMs (as of the cut-off date and as of now), there will be a difference in the fund-house-wise limit on how much fresh international investments they can make.

Now the chances are that with this window now open, many AMCs will reopen their international funds and start taking fresh investments again. But there is still some confusion about what is each AMC’s individual limit based on how the 1st Feb 2022 AUM is calculated.

However, this window may not remain open for very long as fresh inflows and (any) rise in markets will again push up the industry AUM in international stocks and breach the $7 Billion limit once again. As per this Economic Times article (link), the total headroom for the industry might be just 2-3% of the $7 billion limit. So if that’s the case then the industry will be able to add just ₹800-1200 crore of international assets. So if you were to ask about how long the inflows will be allowed, then the answer is that as soon as the AMC/industry reaches the 1st Feb 2022 AUM limit, the inflows will be frozen soon. So the window to invest will differ from one AMC to another and it can close anytime depending on inflows in their international mutual fund schemes.

Nevertheless, the investors who were planning to take advantage of the recent price correction in international stocks can now use this opportunity to increase their international exposure and take advantage of Rupee-cost averaging.

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