The Securities and Exchange Board of India (SEBI), the market regulator, has issued fresh guidelines affecting mutual fund investments, particularly those channeled into Exchange Traded Funds (ETFs) listed abroad. This move comes as mutual funds are nearing the preset investment limits, prompting SEBI to halt new investments in foreign ETFs to ensure regulatory compliance and market stability.
Understanding the Investment Cap
Mutual fund companies traditionally engage in overseas investments through two primary channels: directly purchasing shares of foreign companies and investing in units of ETFs that are listed on foreign exchanges.
There’s a specified investment cap of seven billion dollars for purchasing shares directly and a one billion dollar limit for ETF investments. The mutual funds are reportedly close to reaching these limits, which has led SEBI to enforce this temporary restriction.
Impact on Mutual Fund Schemes
Following SEBI’s directive, investors will no longer be able to initiate new investments in foreign ETFs through mutual fund schemes. This decision is likely to influence investment strategies and portfolio diversifications, particularly for investors looking to gain international market exposure through mutual funds.
The Rationale Behind the Move
Experts suggest that the restriction is a precautionary measure to prevent the overshooting of the stipulated investment ceiling. The limits are set to ensure that there’s a balanced approach to overseas investment, mitigating undue risk exposure while fostering diversified investment portfolios.
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