Mutual funds can now invest up to $3 billion overseas

MONETARY POLICY MID-TERM REVIEW 2006-07/ CONVERTIBILITY ROADMAP

The Reserve Bank of India (RBI) has hiked the investment limit of mutual funds in foreign equity and debt instruments from the current $ 2 billion to $ 3 billion.

"This is a reform step. Domestic mutual funds are yet to even come near the existing limit of $ 2 billion as the Indian markets currently look to be more attractive," said K Ramkumar, head of debt at SBI Mutual Fund.

In the Union Budget, the government had hiked the overseas investment limit by mutual funds to $ 2 billion from $ 1 billion.

Fund houses are yet to use the opportunity to launch schemes to invest in ADRs/GDRs by Indian companies, equity of overseas companies listed on overseas stock exchanges and rated debt securities. Only two domestic funds "" Principal PNB Asset Management Company and Franklin Templeton "" have schemes for the overseas markets while Prudential-ICICI AMC has filed a draft document for 'Asian Equity Fund.

With the bellwether stock index Sensex rising by over 38 per cent in 2006 calendar, on the back of a 42 per cent returns in 2005, it is unlikely that mutual fund houses would rush to launch overseas schemes, said analysts.

"India is the most attractive investment destination at the moment. The RBI has just made an enabling provision that would allow mutual funds to invest more in overseas markets. Mutual funds would use this facility as and when they feel the need to do so," said Ramkumar.

Milind Barve, managing director, HDFC Mutual Fund, welcomed the raising of ceiling on mutual funds' overseas investment as well as the RBI decision to double the personal overseas investment limit to $ 50,000.

"Fund houses would launch more overseas investment schemes, which would help domestic investors to diversify their portfolio of investments," he said.

Putting the hard earned money does not mean that it would give better returns compared to the Indian markets, but surely it would also give fund houses the much-needed diversification of investment.

He also welcomed the RBI decision to allow non-banking finance companies (NBFCs) to market and distribute the mutual fund products.