With the suspension of investments in most MFs holding international equity: What next? Can I now invest in Fund of Funds that buy US ETFs as an alternative? Will Fund of Funds investing in overseas ETFs become popular now? A discussion.
Note: This is a developing story and the recommendations or opinions expressed may require modifications depending on circulars from the regulators. We shall strive to update this article as best as we can.
In our previous article, we have explained the reason for this suspension and investors in these funds (including Parag Parikh Flexicap) are better off waiting for SEBI, RBI and Finance Ministry to extend the investment limits: Explained: Suspension of lump sum investments in MO Nasdaq 100 FOF and MO S&P 500 Index Fund.
What are the existing limits? According to the June 3rd 2021 SEBI circular, Mutual Funds can make overseas investments subject to a maximum of US $ 1 billion per Mutual Fund, within the overall industry limit of US $ 7 billion.
Mutual Funds can make investments in overseas Exchange Traded Fund (ETF(s)) subject to a maximum of USD $300 million per Mutual Fund, within the overall industry limit of US $1 billion.
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Opinion (not a prediction): Considering the existing limits and the implications of money going abroad the govt may not be too keen to allow a huge hike. In future, they may also consider a different (higher) tax rate for such funds. We would be delighted if this does not happen but we feel that investors should be mentally prepared for this. At the very least, we may see a repeat of such suspensions and requests for limit increases in future.
Now that the USD 7 Billion limit is almost crossed, it is crucial that the Fund of Funds (ETFs) limit of US $ 1 billion is significantly enhanced. Otherwise, we will be in the same situation soon (Depending on how the US market moves).
Also, notice that the per fund limit is just $300 million! This is less than Rs. 2300 Crores! Take the NAVI’s new Vanguard ETF based Fund of Fund launching on Feb 4th. If there is enough interest, it may not take long for them to get close to this limit (if not enhanced soon or if not enhanced enough). As for industry-wide limits, inflows into FOFs from ABSL and Kotak (iShares Nasdaq 100 ETF), which may increase now also need to be considered (among others).
So we recommend investors not rush to invest in FOFs investing in international ETFs or any other equivalent of Parag Parikh Flexicap as alternatives and wait for RBI, Finmin and SEBI to enhance the limits. Let us take a call after that.