Capital markets regulator Sebi on Friday proposed facilitating investments by mutual funds in overseas funds, which invest a certain portion of their assets in Indian securities. This is subject to the fact that the total exposure to Indian securities by such overseas funds should not be more than 20 per cent of their net assets, Sebi said in its consultation paper.

The move would help keep the Indian fund of funds (FoFs) true to their label, coupled with cost-effectiveness, for investors.

Considering the strong economic growth prospects of India, the country’s securities offer an attractive investment opportunity for foreign funds and accordingly, various international indices, exchange-traded funds (ETFs), mutual funds (MFs), unit trusts (UTs) allocate a portion of their assets to Indian securities, Sebi noted.

As of April 30, the MSCI Emerging Markets Index has a little over 18 per cent weight to Indian securities. Similarly, JP Morgan’s Emerging Markets Opportunities Fund holds about 15 per cent in Indian investments, according to its latest factsheet as of March 31.

To diversify the portfolio, and as part of overseas FoF schemes, the Indian mutual funds often invest in overseas securities, including units of overseas MFs, ETFs, and index funds. However, current ambiguity regarding investments in such overseas funds that invest a certain portion of their funds in Indian securities deters mutual funds from investing in those overseas MF/UTs, ETFs and index funds that invest in a basket of countries, which may include India.

Sebi has proposed that “Indian mutual fund schemes may invest in such overseas MF/UTs that have exposure to Indian securities, provided that the total exposure to Indian securities by such overseas MF/UTs shall not be more than 20 per cent of their net assets”.