MF investments in foreign ETFs on hold

Fund of funds (FoFs) that invest in exchange traded funds (ETFs) listed on foreign exchanges will have to stop accepting fresh investments from 1 April.

Why? According to the Association of Mutual Funds in India (Amfi), 95% of the $1-billion limit set by the Reserve Bank of India (RBI) for overseas ETFs has been hit.

The limit is close to its breach because of the sharp run-up in US markets, fuelled by US technology stocks, according to industry sources.

Other overseas feeder funds can continue with status quo— i.e., they can accept money so long as redemptions create space for fresh flows.

The limit of $7 billion for funds investing in overseas securities was hit on 1 February 2022, and has not been raised by RBI since then. The Securities and Exchange Board of India (Sebi) communicated the new directive for ETF feeder funds to Amfi, which in turn informed the fund houses.

In 2022, amid a global market correction, the value of international investments held by the fund houses had fallen.

Hence, Sebi gave leeway to fund houses to invest in international securities up to the extent that the value of their international exposure had fallen.

However, no such relaxation has been given this time to

ETF feeder funds.

Several of the FoFs were investing in ETFs tracking the US market index—Nasdaq 100.The index has gained 44% in a one-year period, driven by a rally in technology stocks.

AI chipmaker Nvidia Corp. saw its market cap cross $2 trillion-mark this year with gains of 249% in a one-year period.

Other US technology stocks have also seen a sharp rally in the same period.

The share price of Microsoft Corp. is up 56% in a one-year period, Amazon is up 78%, and Alphabet (Google) is up 40%.

According to Amfi, 95% of the $1-billion limit set by the Reserve Bank of India for overseas ETFs has been hit