Domestic mutual funds' foreign holdings balloon 229%, shows data

Top 10 holdings account for more than 50% of assets

Mutual funds’ investment in shares of companies listed abroad surged this year, increasing to Rs 33,078 crore as of November from Rs 10,042 crore in December 2020.

The sharp climb (see chart 1), seen in the figures of tracker primemfdatabase, comes despite a ceiling on mutual fund investment in foreign companies, which has remained unchanged at $7 billion since 2008.

An increasing number of asset managers are launching schemes that invest abroad.

The weakening of the rupee, such as when the dollar became worth more than Rs 76 earlier in December, provides some respite to absorb fresh inflows. Investment worth $1,000 will absorb Rs 73,000 at an exchange rate of Rs 73. This rises to Rs 76,000 if the rupee depreciates to Rs 76 against the dollar. The opposite also holds true.

The mutual fund industry has been in talks with the Securities and Exchange Board of India (Sebi) to raise the $7-billion limit, according to a person with knowledge of the matter. Sebi and the Reserve Bank of India (RBI) are likely monitoring the situation, and a hike in the limit is expected.

The asset value of Rs 33,078 crore works out to around $4.4 billion at an exchange rate of Rs 75. This reflects the value of the assets held and not the investment made. The value of the assets may have gone up because of market movements as well. This would leave more room before the $7-billion ceiling is hit. Additional inflows into new schemes investing abroad means getting closer to the limit.

A number of new schemes investing abroad have filed documents with Sebi. These include the Motilal Oswal S&P U.S. IPO & Spinoff Fund of Funds, HSBC
Source:primemfdatabase.com

Global Equity Sustainable Healthcare Fund of Fund, Tata Global Semiconductor Fund of Fund, and Navi World Index Fund of Fund.

Overseas funds provide access to investment opportunities, which may not be there in India’s listed universe, said an industry official. This could include premier electric vehicles, global internet and social media companies, and hardware companies, said the person.

The data shows that Tesla, Google parent Alphabet, and computing company Nvidia are among the top holdings (see chart 2). The top 10 holdings account for more than half the assets. Investors are said to be increasingly putting in money in such funds because of the opportunity to diversify, like investing in a currency other than the rupee. Foreign holdings appreciate in value if the rupee falls.

The RBI’s latest bulletin observed that currencies seemed better-placed to absorb volatility now than in 2013. The United States central bank, the Federal Reserve (or Fed), had talked about tapering its liquidity programme and this affected a number of emerging markets.   

“A comparison of the tapering announcement by the Fed this time around with the previous such episode in 2013 shows that equity, bond and currency markets in EMEs (emerging market economies) have exhibited greater resilience so far than in 2013,” it said.