Getting up close and mutual

Funds can invest more overseas. Open-ended and closed-ended funds' dividend anomaly axed.

The Budget has paved the way for domestic mutual fund investors to benefit from investing abroad. Finance Minister P Chidambarm has raised the aggregate investment limit for domestic mutual funds from $1 billion to $2 billion in overseas instruments. Beyond this, a few qualified mutual funds can also invest up to $1 billion in exchange-traded funds abroad.

Thus far, the mutual fund industry could invest up to $1 billion in stocks abroad. But this investment had a caveat that the invested company abroad must hold 10 per cent in a listed Indian company. This restricted the universe of stocks that funds could buy. By removing the need for 10 per cent reciprocal shareholding, the Budget has widened the scope of investment.

Exchange-traded funds are basically indices. According to Dhirendra Kumar, CEO, Value Research, "The ETF route could provide a low-cost investment option for investors interested in investing abroad."

Ved Prakash Chaturvedi, CEO, Tata Mutual Fund, said: "While these proposals will not alter the complexion of the fund industry, it will add to the overall portfolio diversification possibilities for the domestic investor."

Rajat Jain, CIO, of Principal Mutual Fund, expects greater interest in offshore funds from investors. Principal Mutual Fund is the only domestic fund to manage an offshore fund.

The Budget has also done away with the anomaly of dividend distribution between open-ended and closed-ended funds. Thus, investors in closed-ended equity funds such as Morgan Stanley Growth Fund will benefit from regular payouts.

They will not have to wait till redemption to get the benefit. Three fund houses, Franklin Templeton, HDFC Mutual Fund and Prudential ICICI, have launched five-year closed-ended equity schemes recently.