Ban is over, AMCs can again invest in global stocks

Indian asset management companies (the companies that run the mutual funds) had been always allowed to invest abroad subject to a limit. For instance, the limit was $7 billion which was breached in the early part of the current year. Once the limit is breached, the regulator stipulated that fresh investments cannot be made in global stocks and this applied to the mutual fund industry. However, now the SEBI has given a small concession, especially in the light of the sharp correction in the global markets in the last few months.

What exactly is this investment concession that SEBI has offered to mutual funds? SEBI has now allowed the AMCs to resume their investments abroad, albeit with a specific limit and a small alteration. SEBI has stipulated that AMCs can invest overseas to the extent of their international AUM as of 01st February 2022. Effectively, the shortfall could either be due to the redemptions or the correction in the price of international stocks. But the new SEBI alteration allows the mutual funds to fill up that gap, if they so choose.

Why is this an important announcement? Firstly, the redemption pressure on the international funds may not have been high, but the correction has been severe. The diversified S&P 500 has corrected 22% from the peak and is technically in the mist of a bear market. On the other hand, the NASDAQ is down nearly 35% from the peak levels and most of the top notch technology stocks like Apple, Amazon, Microsoft, Google and Facebook have seen deep cuts in their price. That price fall can be filled up at current lower values.

Just to understand with a live illustration. Assume that an AMC had an investment of $10 million in international stocks as on the 01st of February 2022. Let us also assume that due to the market correction, that $10 million investment has depleted in value to $7.5 million which is a 25% correction. That gives the AMC the headroom of nearly $2.5 million of investment in global stocks. On an overall limit of $7 billion, if you factor in the median correction in US markets, the headroom may be of $1.50 billion to $1.75 billion.

For mutual funds, this could be a dual advantage. On the one hand, by allowing funds to invest overseas, SEBI is effectively permitting these mutual funds to buy global stocks at much cheaper valuations. That is also tantamount to an indirect increase in the overseas investing limit, because the limit of $7 billion is now being recalibrated at a time when the valuations are substantially lower. That is like a dual advantage to the mutual funds in India and they should ideally make the best of this facility given by SEBI.

It may be recollected that the Indian mutual fund industry had touched its cap of $7 billion which was available to invest in direct stocks overseas. At that point of time, the numerous AMCs had either stopped taking fresh investments in their internationally focussed funds or in many cases they had also stopped investments altogether. This will allow the retail investors to continue to get the benefit of international investing and also gives the fund manager the leeway to invest in global stocks, to ensure diversification of investments.

From a strategy perspective, this latest step by SEBI will also permit the fund manager to average out some of the good stocks which have fallen do the current circumstances. For example, when the likes of Apple and Microsoft fall, fund managers should have the leeway to add more at lower levels. That is exactly the benefit that the fund managers will derive from the limit enhancement. It will allow them to buy the international stocks at attractive prices and also lower their average cost of holding the same.

However, the mutual fund industry is keen to know if the limit of $7 billion will also be enhanced as otherwise, if the markets really, then the fund managers would be back to square one. For now, it looks like the RBI may be cautious about such limits considering that the INR is already at 80/$ and looking set to weaken.