The Mutual Fund Show: Will Restrictions On Overseas Fund Investments Impact Investors?

Anil Ghelani: This is an industry-wide limit which has come into play for us as a house and for many individual fund-houses. There is still room; there is an individual fund-house limit and over and above that, there is a total mutual fund level limit.

There is a limit of $7 billion. Any mutual fund investing into overseas security – be it stocks, actively managed funds, underlying funds, etc – all these mutual funds put together can go up to $7 billion. And there is a separate limit of $1 billion where we can invest into ETFs, which are listed overseas.

So, this first category with a limit of $7 billion is almost near to getting filled. Mind you, it's not a limit by SEBI, it is a limit indirectly put in by RBI. So, RBI puts industry-level limits on all mutual funds regulated by SEBI.

Hence, as a measure of prudent approach, all mutual funds (find) it’s better to stop further investment going into overseas securities, till the time that limit gets expanded. That limit is still in place.

As a result, from yesterday onwards, as per the industry body AMFI, it was decided jointly that all fund houses will stop accepting fresh inflows into any of these funds, which are invested in overseas securities.

But, let's say, there are certain funds which are investing in overseas ETFs, like for example, we have the DSP Global Innovation Fund. In that, we are going to make investment into two ETFs. So, those are permitted, and we are still accepting funds in that NFO; it is live and running for investors to allocate money.

We can invest only in those ETFs where there is space. But other than that, currently, there has been a stoppage which has been incorporated industrywide for all sets of investors.

I'd like to highlight this includes lump sum investment as well as new SIPs or STP, any systematic plans, new/incremental, but if you have existing SIPs running, that continues as of now.

We have not come to a roadblock on that because if somebody has already registered an SIP, let's say into some fund which is investing in overseas securities, that would continue for now.

Kshitiz Mahajan: Yes, what Anil is saying is right. For existing clients who are doing their SIP or STPs, it will continue. For anybody who's coming in new, they can't register for any SIP or lump sum allocation.

Most of the fund houses have stopped taking allocations much before their entire limit has been burst, like Motilal Oswal still has 110 or Rs 120 crore limit lying with them, similarly for DSP. And for funds with $7 billion limit that has been exhausted or is about to be exhausted, there'll be no new allocation till the time the limit is not increased.

The same thing happened in November 2020 when the limit had been increased from 300 to 600 billion, and in June 2021, the same has been close to 1 billion for fund houses. So, this is a part of RBI controlling currency going out, and that’s how they do it when you allocate outside.

A petition has been filed by AMFI and other people, and it will take some time, and this will be approved.

The $1 billion is the limit per fund house for fund of funds. There are seven fund houses, and $1 million is the overall limit for an ETF. When you do an ETF, you are not buying any fund, you are just replicating a fund or let’s say index which is outside.

Like Anil mentioned, they (DSP) were supposed to have three fund of funds and two ETFs in their fund, which is a new innovation fund which is going on. There are options with Motilal Oswal where they have a Nasdaq ETF, and they have their Forex ETF and then Nasdaq Next 50 ETF where they can accept some allocation through demat trading only.

When you invest into an ETF, you can give a physical application to the AMC depending on lot size or you can buy straight away from whatever app you're trading, NSE or BSE also. But in this case, you can only trade from the terminal, but you can't buy a physical unit from AMCs. They are not accepting that.

There is a market maker involved here in India. Volumes on Nasdaq are good, but other ETFs which are right now traded in Indian markets and which give you access to global allocation, their volumes are not that good.

So, there are spreads that the market maker makes, maybe that's not conducive for most of the clients who are looking at foreign allocations right now.

My view is that one should look at postponing right now or evaluate pros and cons on the existing funds, like what Anil mentioned about the DSP Fund. Otherwise, you can wait and allow this thing to settle and limits to increase, and then you can start again.

Anil Ghelani; I'll just add a correction to this. This is a structural limit which has got hit. RBI prescribes the overall limit for MF as an industry which is $7 billion. Within that, SEBI had taken the view and given different numbers.

For example, you said a couple of months back or a year or two back, each fund house had a limit of 300. Let's say one or two fund houses approached that limit and they reached over to SEBI and said that the limit got touched. So, they said within that overall limit of $7 billion, there is a lot of space, so let us increase it to 600.

For example, we at DSP were the initial players to start International Feeder Funds. In 2006, we started a fund called DSP World Gold Fund, and then World Energy, World Mining, U.S. Flexible, etc. So, very quickly, we had finished the 300 million limit. So, we approached SEBI, and they said okay, we are giving you another 300. So DSP had 600. This time, they said instead of giving it to individual fund houses, we will make it industry level. They issued a circular that any fund house can go up to 600, and then they said up to 1 billion, but they could not touch the total limit of 7 billion because that is the controlled limit by the RBI.

So, as an industry we have reached that total limit. Even if we approach SEBI, they can’t relocate between one house to another or increase that. So, it is the overall limit that must get opened up.

Anil Ghelani: Existing SIP is going to continue temporarily, because right now, we as an industry are very close to hitting that limit. So, if temporarily SIPs continue, we are still within the limits. Some amount will keep going. But at some stage, when we find that the limit suddenly gets filled up fast, then it's a mandatory thing and SEBI will stop it.

But the hope is that it's informed to the policymakers, and everyone is watching the numbers closely. One can assume that maybe there was a busy season because of the recent budget. We are hopeful that we will get them very fast.

Kshitiz Mahajan: Yes, if the limit will be breached, then all AMCs need to stop sales. Having said that, I don't see that happening because in 2008, when the limit was set, we had almost $300 billion of foreign reserves; right now, it is close to about $700 billion. There is no reason why the limits will not be increased.

And if it does, options are available with Indian industry to invest directly into these stocks. These are not new names which we are talking about. Everybody knows about these stocks and in most cases people can evaluate their risk appetite.

I always say that one should have 10% to 15% allocation in international stocks or international funds. People who have time can do it themselves. And there are a couple of platforms coming up which have been started by our colleagues. Many of the clients are looking at having direct holding of stocks.

Interestingly, in India if you buy a Reliance share, you have to shell out Rs 2,300-Rs 2,400, but in the U.S., fractional buying is also allowed. You don’t have to buy a $3,000 Amazon share in one go, so you can buy it in fraction also.

ETF route is also available. You can open an account in Singapore or Dubai, and through that, you can actually buy ETFs which you can’t buy right now here. You can buy any funds through that also.

But yes, the cult of owning all these big-store names like Tesla, Amazon, Apple, and Microsoft, it is increasing. I have many people in my circle who now want this international flavour in their portfolio. You might see that cult increasing a bit from here onwards.

Anil Ghelani: Any fund like DSP Global Innovation Fund. In that fund, our underlying investment is into ETFs. So, there is no restriction. There is a separate limit of $1 billion where we are very comfortable right now as an industry. So, there is no discomfort in terms of lump sum or SIP; everything is welcome and open.

Personally, for a retail and HNI investor who wants to invest small amounts, this is the more suitable route because you come into INR rupee terms, just go to a website or an exchange platform, buy as little as Rs 5,000 to Rs 50 lakh or Rs 5 crore.

But still, there is a bit of restriction. If you are going through LRS (Liberalised Remittance Scheme) route, there is a $2.5 lakh restriction, FX risk, etc. So, that is also superb provided that you have that kind of skill-set to do it. Otherwise, both are easily available.

Kshitiz Mahajan: Underlying technology is same for both the funds, but disclosures are there in Factor Funds, it's not there in a Quant Fund. Quant is more of a scientific model-based fund or AI-based fund.

Many funds are coming with AI technology where they put some filters on that AI; it can be Jenson’s Alpha, it can be BB or any other ratio, domestic, international, different asset classes… They go through that entire process.

At the end of the day, they filter out that this is the portfolio they have to work out wherein factor has been disclosed properly, whether you want to play momentum, growth, value – everything has been disclosed properly in the fund.

Factor Fund is a good combination of your active and passive fund which gives you a little edge on the return, with a little less risk because you filter out little less good stocks with a little more good stocks. That's the broader difference between these two.

But, in India, there are many misnomers. Many of the funds are called Quant, but they're not Quant. They are a Factor or Smart Beta Fund. I have gone through these models and realised that many of the funds are Smart Beta Funds and not Quant Funds because they're disclosing everything that they are doing.

Anil Ghelani: Absolutely. It’s one and the same.

For example - Let’s say you have been given a diet by a dietician. You need to have ‘X’ quantity of proteins, minerals, and carbohydrates. We don't look at the food item we are eating. We dissect it into different components such as carbohydrates, protein, etc.

Likewise, for each security, stock or index, or whatever you call it, each item can be dissected for its risk and return objectives into different elements, which are nothing but what we define as ‘factors’; it can be momentum, value, growth, quality, etc.

Your financial advisor will guide you that you need to have say a momentum-based allocation in your portfolio. So now, asset managers like us will give you single-factor fund or a momentum fund.

If you want quality, they say there is a quality-focused fund. Or if you want a multi-factor fund with momentum and low volatility, they will create such a fund.

For example, we have a fund called the DSP Quant Fund. That fund is a multi-factor fund. It has got a combination of three factors – quality, growth and value. What are we doing here is using three different factors combined into a model and running that.

The outcome of that is very similar to a single-factor fund. For example, we have a single factor fund related to quality called DSP Nifty Midcap 150 Quality 50.

Outcome of both of these is that it eliminates or dissects certain segments of stocks, which are not in line with that particular factor or that particular filter is being applied.

It can be through AI, individual, through the exchange, an index provider or in-house model – all of that becomes secondary. Once it is clear, you understand that it is just a name whether you call it a Quant Fund, Factor Fund, quality, momentum, etc. All these are factors.

If you package it like an Index fund or an ETF, you have to compulsorily have it as a public index, which has to be disclosed on the website of the index portal, like for example NSE and BSE, and live ticker running has to be done. Or if you do it in-house as a model, you still have to disclose.

On our website if you go to DSP Quant Fund, disclosure of each and every detail will be there – how that factor is being run, etc, but it is not a live index on a public website. That’s the difference.

Kshitiz Mahajan: Factor Funds disclose much more than what a normal Quant Fund does. Quant Fund talks about various spreads or technology through which they are filtering it out. There are a lot of good funds in DSP. DSP Quant Fund is a good fund, but I feel it's a Factor Fund and not a Quant Fund.

I said it's a misnomer because they disclose. I've studied Tata Quant Fund and DSP Quant Fund. Tata Quant Fund is actually a true Quant Fund because of the way they are working on various ratios, global scenarios, are looking at macros, and are filtering it out.

We have already considered DSP. ICICI has a very good offering on the Quant side; Axis has a very good Quant Fund which works on price to earnings, price to book value and dividend model. So, there are three or four good funds which one can look at.

But again, as Anil said, one should not look at talking about returns which are out of the world. It is just that you are making your risk a little less and you are making returns a little extra. That's the only difference; it looks at what actually suits you.

Some clients will say they are a growth-style investor and want to look at growth side only. You will look at a fund which is more of growth or momentum-oriented portfolio, like ICICI, which has a momentum portfolio. Edelweiss has a momentum portfolio; they call it the Nifty 30 Momentum portfolio where the growth is coming.

So, one can look at these types of funds depending on his/her style of investing.

Anil Ghelani: Structurally, as a mutual fund investor, nothing has changed or as a retail individual, nothing much has changed. Yes, certain structural changes may have happened, which will have medium to long term impact and implications which will result in maybe better growth in terms of the underlying economy or sectors, but otherwise structurally as a mutual fund investor, I would not like to venture into any particular big changes. Nothing has changed.

Kshitiz Mahajan: I think for the industry, a lot has changed. Thanks to the tax which has come on crypto, you will find some serious investors coming through the mutual fund route now because nothing is that easy to make on crypto.

Second, the capex which they have decided of Rs 6.7 lakh crore, which is 35% incremental on the base right now, will give a lot of boost to technology and infra space. So, one can start looking at those funds maybe, if you have not taken some allocation. You can start looking at those funds where they have some more allocation towards technology as well as infra.

If you actually see the broader index across the globe, not Nasdaq but S&P 500 or let's say Germany, Japan, or China, the technology or IT participation there is 30-31%. In India, it is only 17-18%. So I think we will cover up. As a technology partner, we are becoming very serious about our various partners across the globe.

Infra space should look at doing well as well as the technology space. These are the two spaces.

People can actually look at a few funds like the HDFC Focused 30 Fund, Kotak Economy Recovery Fund, a fund by DSP Infra, etc. You can actually look at the portfolios where we can actually see some extra allocation on these lines.