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These overseas mutual funds allocate a portion of their assets to Indian securities.
This step aims to simplify the investment in foreign MFs/UTs.
The markets regulator, SEBI (Securities and Exchange Board of India) has permitted mutual funds to invest in overseas mutual funds or unit trusts. These overseas mutual funds allocate a portion of their assets to Indian securities. This investment has been capped at 25 percent of the overseas funds’ net assets. SEBI has stated the objective behind this initiative in its circular. This step aims to simplify the investment in foreign MFs/UTs (Mutual Funds/Unit Trusts) and increase transparency. This will also enable the MFs to diversify their overseas investments. Overseas Direct Investment (ODI) are the investments made by Indian entities in a foreign country.
In addition to these aspects, the MF schemes would be required to ensure that all investor’s contributions to an overseas MF/UT are combined into a single investment vehicle. There should be no side vehicles. The corpus of an overseas MF/UT should be a blind pool with no separated portfolios. This will ensure that all investors have equal and proportionate rights in the fund. According to SEBI, “All investors in the overseas MF/UT have pari-passu and pro-rata rights in the fund, that is, they receive a share of returns/gains from the fund in proportion to their contribution and have pari-passu rights.”
SEBI has also stopped the advisory agreements between Indian MFs and the underlying overseas MFs. It has been done to prevent any conflicts of interest. If after the investment, the exposure breaches the threshold limit, there will be an observance period of 6 months. This period would be from the date of publicly available information of such breach Indian MF schemes for monitoring of any portfolio rebalancing activity by the underlying overseas MF/UT. Portfolio rebalancing is the process of adjusting the weightings of different assets within an investment portfolio. This practice involves redeeming particular investments and reallocating funds to other assets to restore the desired target asset allocation.
In the observance period, the Indian MF scheme would not undertake any fresh investment in such overseas MF/UT can resume their investments in such overseas MF/UT in case the exposure to Indian securities by such overseas MF/UT falls below the limit of 25 percent.
