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Hurdles for Retail Investors to Invest Overseas

Hurdles for Retail Investors to Invest Overseas

Are retail investors losing out in the race to invest overseas?

Illustration: Raj Verma Illustration: Raj Verma

Twenty-eight-year-old Rahul Sharma, a software engineer at one of India’s bellwether IT firms, opened a demat account in 2021 after looking at the zooming stock markets. Since it was his first time investing in a new asset class, he chose the relatively simpler route of mutual funds (MFs) to invest in overseas stocks. Following his research, he began by investing in ICICI Prudential Bluechip Fund, Parag Parikh Flexi Cap Fund, and Motilal Oswal S&P 500 Index Fund. Not long after, what jolted him was the Securities and Exchange Board of India’s (Sebi) circular advising MF firms to stop further investments into foreign equities. Five months on, and Sharma still doesn’t know when he will be able to restart his SIPs.

Many retail investors like Sharma looking to invest in overseas stocks and diversify their portfolio via internationally focussed MFs are feeling stuck. “About 1.2-1.4 million folios across the industry currently have exposure to international markets, so a sizeable chunk of retail investors are missing out on international diversification,” says Pratik Oswal, Head of Passive Funds at Motilal Oswal AMC on the number of retail investors impacted by the limit on overseas investments in equities by MFs.

Expressing concern about the current situation, Dhirendra Kumar, CEO of Value Research, says that it is a great disadvantage for retail investors in India. “The restriction coincides with one of the biggest corrections in the US and other global markets, depriving them of the opportunity to invest in a down cycle,” he says. The US markets have fallen over 20-30 per cent from their all-time highs. Especially the Nasdaq and the FAANG+ stocks that are witnessing a deep correction following a long, uninterrupted bull run.

Most personal finance experts believe that for retail investors, geographical diversification today is far more important than ever before. Especially in sectors like technology, one doesn’t have much choice as the biggest tech-focussed companies are listed abroad.

Back in January 2022, capital markets regulator Sebi had asked MF houses to stop taking fresh subscriptions in schemes investing overseas. The directive was mainly on account of the MF industry nearing the mandated limit for overseas investments. As per the rules, domestic MFs can invest up to $7 billion collectively, and $300 million individually in overseas stocks, along with an additional $1 billion in exchange-traded funds (ETFs).

Even though Sebi lifted the restriction earlier this month and allowed MFs to resume accepting fresh money from investors, only a few funds have begun to do so.

Leading fund houses in India such as ICICI Prudential, Edelweiss, Nippon India, Mirae, and PGIM have begun accepting money, but every fund house is doing it differently. While some are accepting lump sum amounts, others are accepting SIPs.

Explaining the reason behind why some funds are accepting fresh flows while others are not, Oswal says, “Funds have begun accepting money due to redemptions amid the recent market correction. They are doing so to close the gap created by redemptions. However, some of these AMCs have already closed funds again after re-opening, and I believe it won’t last too long [for the others too]. Just a couple of weeks more before the limit gets reached again and all those funds may stop accepting money again.”

As an alternative, investors can invest in overseas ETFs, which have a separate limit of $1 billion. One can also look at availing the RBI’s liberalised remittance scheme (LRS). Under LRS, resident Indians can remit up to $250,000 in a financial year to purchase foreign securities, among other purposes. However, experts believe this to be an expensive route and not wholly feasible for small-time retail investors. Investors can also look at opening a trading account with foreign brokers to trade in international stocks.

Most experts believe that while alternative options exist, MFs happen to be the best vehicle for small retail investors to get exposure to global equities due to their simplicity and convenience. While some believe an upward revision of the overseas limits may be in the offing, others say that the central bank may not do it immediately because of the pressure it could put on the rupee. The rupee is already at historic lows as FIIs have been on a stock-selling spree in India and if domestic investors now begin to allocate higher funds to overseas stocks, it could further weigh on the local currency.

The MF industry, however, has been demanding higher limits to provide a fair chance to investors. “If you look at an average investment portfolio outside India, say in the US, UK or Southeast Asia, there is a 15-20 per cent international exposure. This could be the trend over the next decade in India, looking at the interest generated over the last 12-18 months,” says Oswal. We will have to see how things pan out, he adds.

 

@sakshibatra18