Capital markets regulator Sebi on Friday proposed facilitating investments by mutual funds in overseas funds, which invest certain portion of their assets in Indian securities.

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This is subject to the fact that the total exposure to Indian securities by such overseas funds should not be more than 20 per cent of their net assets, Sebi said in its consultation paper.

The move would help keep Indian fund of funds (FoFs) true to their label, coupled with cost effectiveness, for investors.

Considering strong economic growth prospects of India, the country's securities offer an attractive investment opportunity for foreign funds and accordingly, various international indices, exchange traded funds (ETFs), mutual funds (MFs), unit trusts (UTs) allocate a portion of their assets to Indian securities, Sebi noted.

As of April 30, 2024, the MSCI Emerging Markets Index has a little over 18 per cent weight to Indian securities. 

Similarly, JP Morgan's Emerging Markets Opportunities Fund' holds about 15 per cent in Indian investments, according to its latest factsheet as on March 31, 2024.

In order to diversify the portfolio, and as part of overseas FoFs schemes, the Indian mutual funds often invest in overseas securities, including units of overseas MFs, ETFs, and index funds.

However, current ambiguity regarding investments in such overseas funds that invest a certain portion of their funds in Indian securities deters mutual funds from investing in those overseas MF/UTs, ETFs and index funds that invest in a basket of countries, which may include India.

Accordingly, Sebi has proposed "Indian mutual fund schemes may invest in such overseas MF/UTs that have exposure to Indian securities, provided that the total exposure to Indian securities by such overseas MF/UTs shall not be more than 20 per cent of their net assets".

The regulator noted that if an overseas FoF offered by an Indian mutual fund invests in overseas MF/UTs with a significant allocation to Indian securities, it may not be true to the fund's label, and may not reflect the overall purpose of investing in such an FoF.

Also, Sebi noted that direct investment in Indian securities by an Indian investor would be cost effective rather than investing in Indian securities through an overseas FoF offered by Indian mutual funds.

"Therefore, in order to facilitate investments in such overseas MF/UTs, it may be prudent to permit Indian mutual funds to invest in such overseas MF/UTs having certain limited exposure to Indian securities.

"Additionally, putting adequate safeguards for such investments would keep Indian FoFs true to their label as well as enable investors to take desired exposure in overseas securities," Sebi said.

The Securities and Exchange Board of India (Sebi) has sought comments from the public till June 7 on the proposal.

While investing in such overseas MF/UTs, the Indian mutual fund schemes will have to ensure that the contribution of all investors of the overseas MF is pooled into a single investment vehicle, without the presence of any side-vehicles; such overseas MF should be managed by an independent investment manager and such overseas MF should disclose their portfolios periodically to the public to maintain transparency.

Additionally, Sebi suggested that there should not be any advisory agreements between Indian mutual funds and underlying overseas MF, in a bid to prevent conflict of interest and avoid any undue advantage.