Sebi asks funds investing in overseas ETFs to stop taking fresh money from April

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.  

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

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 communicated the new directive for ETF feeder funds to Amfi, which in turn informed the funds 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.  

US market rally 

Several of the FoFs were investing 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., which 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%.

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