The Securities and Exchange Board of India (Sebi) has directed mutual funds to stop accepting inflows into schemes investing in foreign exchange traded funds (ETFs) from April 1, 2024. He explained that this was done in response to difficult conditions in the mutual fund industry. It is about to surpass the $1 billion limit set for overseas investment. What does this mean for retail investors?
International funds have been popular with Indian investors for over a decade. Investment regions span most parts of the world, but the United States appears to be particularly attractive for a variety of funds. The reasons for this are manifold, including improving returns, taking advantage of a weaker currency, and gaining access to companies hitherto inaccessible to Indian investors, but from an asset allocator’s perspective, they seek stability with reasonable returns. Investors need international diversification.
However, there is a catch. Investing in foreign securities is permitted through one of two routes: direct investment (including fractional holdings) within the Free Remittance Scheme (LRS) or through ETFs/mutual funds. There are two caveats to LRS. One, there is a limit to the amount you can invest and two, above a certain threshold, you will be subject to TCS (tax collected at source) of up to 20%. Investments that take the latter route are subject to both financial and industry constraints.
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According to AMFI data released in February 2024, assets in offshore investment schemes currently stand at around Rs 40,000 crore, with 57.2% passively managed and 42.7% actively managed. This is small compared to Rs 59,000,000 crore for the leading mutual fund industry. However, since global investing attracts the attention of 22 million investors, any change in operations is “inconsequential”.
This ruling will affect 57% of this asset in a number of ways, but primarily prevents authorized participants from creating new units (and vice versa, i.e., underlying assets or redeemable units). sale is permitted). This means that if there is demand, there will be no supply. units may be restricted, resulting in a premium (relative to iNAV or eNAV).
Is that reflected in transaction prices? It’s not quiet, or rather it’s not like it was when the “foreign funds restrictions” were first imposed. In the case of the NASDAQ100 ETF listed on the Indian Stock Exchange, counter-intuitively, it has been trading at a discount rate of around 3.25% to eNAV (calculated from live trading of Globex eMini futures during Indian market hours). More than 10,000 healthy shares are on sale.
Why is this so? Against a backdrop of election-induced instability in the domestic market, activity was subdued as trading was healthy and there was no additional demand for ETFs. The situation could change if there is no global crash and the Indian market corrects sharply.
When investing in international markets, it is important to know what the underlying asset is worth. One of the indicators is to look at live trading futures and the iNAV issued by his ETF manager. Just like any other stock, you can buy it at a discount and sell it at a premium. However, you need to be careful. Most of these investments involve additional complexity and therefore currency fluctuation risk. Therefore, it may be wise to view these funds as part of your allocation rather than in isolation. At least not because of the difference in taxation when compared to domestic equity investments.
These are simple investments in foreign markets and it is perfectly possible to manage them in DIY mode. However, if you are new to investing, new to investing, or lack knowledge, consider consulting a SEBI-registered investment advisor.
(The author is a managing partner at Aryzen Capital Advisors)
(issued April 7, 2024, 23:20 IST)
