SEBI Halts Overseas ETF Inflows, Directs Mutual Funds to Cease Acceptance

Introduction

SEBI, India's regulatory authority for securities markets, has recently taken a significant step by halting inflows into overseas Exchange-Traded Funds (ETFs) and instructing mutual funds to cease acceptance. ETFs are often favored by individual investors due to their superior daily liquidity and lower fees compared to mutual fund schemes. Additionally, they are widely regarded as being more tax-efficient. Mutual funds currently have a maximum limit of $7 billion for investing in overseas securities. However, there exists a distinct ceiling specifically for investments in overseas Exchange-Traded Funds (ETFs), set at $1 billion. The threshold for ETF investments is rapidly approaching its limit.

With effect from April 1, the Securities and Exchange Board of India (SEBI) has directed the Association of Mutual Funds of India (AMFI) to cease accepting inflows into funds that allocate investments to overseas ETFs.

Overseas Exchange-Traded Funds (ETFs)

Overseas Exchange-Traded Funds (ETFs) are financial instruments that provide investors with exposure to a variety of assets listed on foreign exchanges. These assets can include stocks, bonds, commodities, or other securities traded in international markets. Unlike traditional mutual funds, which are managed actively by fund managers, ETFs typically passively track specific indices or baskets of assets.

Understanding Exchange-Traded Funds (ETFs): An Overview of Tradable Securities

Exchange-Traded Funds (ETFs) are marketable securities designed to mirror the performance of an index, commodity, bonds, or a collection of assets, similar to index funds. Distinguishing themselves from traditional mutual funds, ETFs trade on stock exchanges just like common stocks. Consequently, the price of an ETF fluctuates throughout the trading day, reflecting the continuous buying and selling activity on the exchange. The trading value of an ETF is derived from the net asset value of the underlying stocks it represents.

ETFs offer superior daily liquidity and lower fees compared to mutual fund schemes, making them an appealing option for individual investors. Additionally, ETFs are recognized for their tax efficiency, setting them apart from other mutual fund schemes. Primarily, there are five categories of ETFs available to investors: equity ETFs, bonds ETFs, commodity ETFs, international ETFs, and sectoral/thematic ETFs.

Two Types of Mutual Fund Schemes: Exploring Varieties in Investment Options

• A Mutual Fund Scheme that Directly Purchases Foreign Shares within a $7 Billion Limit.
• Another Mutual Fund Scheme, referred to as Fund of Fund, Invests in Units of Overseas ETFs within a $1 Billion Limit.

Four funds from Nippon India Mutual Fund, namely Nippon India Taiwan Equity, Nippon India US Equity Opportunities, Nippon India Japan Equity, and Nippon India ETF Hang Seng BeES, have ceased accepting new investments. However, they have assured that existing registered Systematic Investment Plans (SIPs) and Systematic Transfer Plans (STPs) will remain operational.

At present, the majority of global funds, excluding ETFs, are open to fresh investments. However, experts warn that this situation may fluctuate depending on the headroom available to fund houses.Top of Form

SEBI's Directive to Mutual Funds: Understanding the Motives

1. One potential reason behind SEBI's decision to implement new conditions on mutual funds could be the concern over breaching the investment limit. With approximately 95% of the limit already breached, the recent surge in US markets, particularly in US technology stocks, poses a risk of surpassing the limit soon. Market experts suggest that this situation might have prompted SEBI to take proactive measures.
2. Previously, there existed a $7 billion limit for funds investing in overseas securities, which was reached on February 1, 2022. Despite this, the Reserve Bank of India (RBI) chose not to raise the limit.
3. The impending breach of the limit to invest in overseas ETFs could serve as a significant factor behind SEBI's imposition of new conditions on Mutual Funds.
4. The regulator has asked to stop fresh inflows in such schemes from April 1. Presently, the Reserve Bank of India (RBI) has established an overarching cap of $7 billion for fund houses to invest in overseas stocks or mutual funds. Additionally, mutual funds are authorized to allocate funds up to $1 billion in overseas exchange-traded funds (ETFs). The mutual fund industry has been advocating for an increase in the overseas investment limit of $7 billion from the RBI.

Conclusion

SEBI's proactive approach to halting overseas ETF inflows demonstrates its commitment to safeguarding investor interests and maintaining market integrity. By issuing directives to mutual funds and addressing concerns related to international investments, SEBI underscores the importance of regulatory measures in sustaining market stability. As India's financial markets continue to evolve, SEBI's actions play a crucial role in fostering investor confidence and ensuring the resilience of the financial system.

References

https://indianexpress.com/article/explained/explained-economics/sebi-fund-houses-stop-overseas-etf-9230021/

https://www.india.com/business/sebi-asks-mutual-funds-investing-in-overseas-etfs-to-stop-accepting-inflows-6805305/

https://www.moneycontrol.com/news/business/personal-finance/sebi-asks-mutual-funds-to-stop-accepting-inflows-in-etfs-investing-overseas-12502121.html

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