Whether or not the upper limit for mutual funds investing in foreign stocks should be increased has been a matter of debate for several years. Many argue that the cap has remained unchanged since 2009 and must be increased now.
This debate has recently been brought up again by Deepak Shenoy, Founder and CEO of Capitalmind, a financial advisory firm, in a Social media post on X. In that post, he mentioned that the Reserve Bank of India (RBI) should increase the limit for mutual funds investing in foreign stocks from $8 billion to $50 billion. He argued that the recent increase in foreign stock investing should be coupled with an increment in the upper limit.
In February 2022, the Indian Mutual Fund industry reached its limit of $7 billion. To prevent a breach, Sebi decided to temporarily halt new investments abroad.
In this blog, we discuss the arguments for and against the RBI increasing the limit on foreign stocks. Read on to learn more about the latest developments.
To learn more about this and any other investment opportunities, contact a trusted mutual fund agent in Kolkata.
The Existing Limits on Overseas Investments
The current cap set by RBI on how much Indian mutual funds can invest in foreign securities remains $7 billion, which is the industry-wide limit. However, individual fund houses can invest a maximum of $1 billion each. In addition, the limit for investments in overseas exchange-traded funds (ETFs) is $1 billion.
These limits were placed in 2009 and have not been changed since. As mentioned, investments in international securities by Indian mutual funds were suspended in February 2022, when the $1 billion cap was reached.
Considering the record level of India’s Forex reserves, there is a growing sentiment within the MF industry that the RBI should reconsider and raise these caps.
A qualified Mutual Fund Advisor in Kolkata can provide details about overseas investments.
Arguments for Increasing the Limits
Of the 64 lakh crore of assets managed by the Indian mutual fund industry, around 75,000 crore is in overseas equity investments. These investments include international funds of funds (FoFs), direct equities, international ETFs, and domestic equity schemes. As forex reserves increase substantially, many believe that raising the limits of international investments is both timely and necessary.
The stability of the Indian rupee in recent years is another factor that further supports the case for increasing these limits. Higher overseas investment would allow investors more options to diversify their portfolios, which is particularly valuable in mitigating risks during potential market downturns.
As Indian investors wish for global diversification of assets, this increasing cap would also cater to that demand. The international market presents various opportunities for investors, who would thus be able to manage risks better and capitalize on global economic growth.
Any qualified mutual fund agent would argue the same way about increasing the limits.
The Strong Macroeconomic Position of India
India’s macroeconomic fundamentals are robust, characterized by a low current account deficit (below 1% of GDP), strong foreign institutional investment inflows, and a substantial cushion provided by the forex reserves. These factors indicate that the Indian economy is well-positioned, thus justifying the enhancement of the cap limitation even more.
The recent changes in the budget have made international investments more appealing. The taxation of international Funds (FoFs) has been revised and reduced to 12.5% on long-term capital gains. This adjustment has made international investments a lucrative option for Indian investors, further amplifying the call for higher limits.
The Risks Associated
While the rationale for raising overseas investment limits is exciting, it’s worth considering its risks. An increase in overseas investment would mean greater capital outflows, and the Indian rupee might feel pressure, destabilizing the currency. In addition, the volatility of the global economic environment, with geopolitical uncertainties and market fluctuations, presents challenges to international investment.
So, while raising the investment limits could pose significant advantages for investors, it could also mean greater risks. RBI would likely consider these factors before making a decision.
Final Thoughts
India’s Forex services are at a record high, and the economy is demonstrating robust growth. Hence, investors want the RBI to raise the caps for mutual funds to invest in foreign markets. Such a move would offer investors a chance to diversify their assets and manage risks on a global scale.
However, there are risks involved, and RBI requires a careful assessment of those risks before any final decision is made.
As the mutual fund industry awaits RBI’s decision, investors hope that the current robust economic conditions will lead RBI to make a decision that would benefit both the industry and the broader economy.
If you are looking for a trusted Mutual Fund Agent in Kolkata, you can always approach us for the best investment advice and the latest and most profitable opportunities.