Recently, the Securities and Exchange Board of India (SEBI) has allowed Indian mutual funds to invest in overseas mutual funds, or unit trusts that deploy some deployment on the security of Indian instruments. This develops the scope and, the degree of openness in the Indian mutual fund industry.
This new guideline raised the limit of investment for Indian MFs to 25% of their TAA in overseas funds. In this regard, it is usually made for exposure to a pre-determined amount of Indian securities. Such a methodology would attract foreign money with stringent oversight of Indian assets covered within the foreign funds.
Key Conditions for Investment
Sebi has set specific rules for these investments:
- Combined Investments: Indian MFs must pool all their investment in foreign funds into one single investment vehicle. There should not be separate accounts or “side” arrangements for different investors.
- Blind Pool System: Foreign mutual funds must function as blind pools, meaning they cannot have separate portfolios for each investor. This ensures that all investors share the returns equally based on how much they invest.
- Advisory Limitations: To avoid conflicts of interest, Sebi has banned advisory agreements between Indian MFs and foreign funds. This will protect the interests of all investors and ensure fair decision-making.
Monitoring Compliance
If an overseas fund exceeds the 25% limit on Indian securities, Indian MFs will be granted an observation period of six months during which the fund’s rebalancing actions can be monitored. At this time, the offending overseas fund cannot have new subscriptions until it has brought its exposure below the regulation limit.
The introduction of these guidelines now opens a new chapter for Indian MFs, which will facilitate them to better diversify their portfolios while there will also be stringent rules safeguarding investments.
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