The finance ministry’s guidelines allowing foreign
individual investors to invest in Indian mutual fund schemes should be music to
the ears of the industry. Fund-starved since the entry load ban, the industry
would look to tap international investors aggressively.
The finance ministry has capped the cumulative investment
limit to $10 billion or Rs 45,000 crore. This will be reviewed after six
months. The Securities and Exchange Board of India (Sebi) will notify the final
guidelines by August 1.
As on May 31, the mutual fund industry’s total assets under
management stood at Rs 731,448 crore. The entry of foreign investors is likely
to make the market more vibrant.
The advantages are obvious. According to market experts,
internationally, foreign retail investors hold mutual funds in their country
for an average of five years. In comparison, Indian retail investors hold it
for only 18-24 months. In addition, they invest larger sums. This implies more
money as well as stable money. This, in turn, could increase the depth of the
market.
The reverse is also true. Today, foreign institutional
investors dominate the Indian equities market. Their inflows and outflows
impact the benchmark indices substantially. In fact, they more or less decide
the market sentiment. Since January, they have sold net equity (according to
data with the exchanges) worth Rs 12,049 crore. This has dragged the markets
down by more than 10 per cent.
One fear experts have is that any change in the sentiment
can lead to large outflows as well, leading to redemption pressures on the
scheme. This could hurt domestic investors as the net asset value of the scheme
will suffer.
The new class of investors, called qualified foreign
investors (QFI), will be able to invest through the depository participant
route as well as the unit confirmation receipt system, which will involve
custodians. QFIs can be individuals and bodies, including pension funds. Though
industry players are rather upbeat about the announcement, they say they are
awaiting final guidelines from Sebi regarding the same. Fund houses, too, will
have to gear up to attract foreign retail investors.
While Sebi guidelines are awaited, it would be interesting
to see if the market regulator separates schemes for foreign investors. For
instance, even as a fund house has the same scheme today, collections from
retail and institutions are kept separately. That is, ICICI Prudential Indo
Asia Equity has a separate institutional and retail scheme. The question is,
would foreign retail investors be allowed to invest in the Indian retail scheme
or a third variant would be made available to them? Experts say this move is
more beneficial for investors from smaller countries. In bigger countries,
investors have the option to invest in the country through India-dedicated
funds.