Mutual funds to stop fresh inflows in overseas ETFs from April 1: Here's why

The Securities and Exchange Board of India (Sebi) has directed asset managers to halt inflows into schemes investing in overseas exchange-traded funds (ETFs) effective April 1. Experts believe that Sebi's move come on the back of overall industry surpassing the $1 billion (approximately ₹8,311 crore as of March 21, 2024) limit.

Consequently, the Association of Mutual Funds in India (AMFI) issued a letter to fund houses instructing them to cease accepting subscriptions to funds investing in overseas ETFs from April 1, 2024.

However, subscriptions to funds investing in overseas securities other than international ETFs can continue until further communication from the regulator.

Overseas ETFs are investment funds traded on stock exchanges that primarily hold assets such as stocks, bonds, commodities, or a combination thereof, but are based in foreign markets.

The latest move echoes a similar restriction imposed in late 2022 when global financial markets experienced significant corrections, prompting Indian fund houses to invest in foreign stocks within a capped limit of $7 billion for the industry.

However, the recent surge in international markets, particularly in the United States, has seen US-focused funds delivering decent returns. Notably, the Mirae Asset NYSE FANG+ETF FoF emerged as the top performer in the international category, yielding 79% returns in 2023, according to Value Research report.

With the halting of inflows into schemes investing in overseas ETFs, investors may be temporarily unable to add an international element to their portfolios.

This move could significantly alter investment strategies, particularly for those seeking exposure to foreign markets, diversification, and potentially higher returns.