The Indian mutual fund industry is predicting a mixed impact from the Union Budget’s decision to allow foreign investors to invest in Indian equity schemes in a bid to deepen the resource base for the capital markets. On the positive side, the move may ensure strong fund flows in the coming year and help asset management companies to broadbase services. However, the finer details, such as the know-your-customer norms, distribution and taxation issues need to be looked into before getting into action.
Finance minister Pranab Mukherjee said it has been decided to permit Sebi-registered mutual funds (MFs) to accept subscriptions from foreign investors who meet the KYC requirements for equity schemes and that this would enable Indian MFs to have direct access to foreign investors and widen the class of foreign investors in Indian equity markets. Currently, only foreign institutional investors and sub-accounts registered with Sebi, and NRIs are allowed to invest in MF schemes.
Navneet Munhot, CIO, SBI Mutual Fund, said, “Allowing foreign investors to invest in domestic mutual funds is a bold move towards liberalising the capital account.”
“The proposed entry of foreign investors into the mutual funds space will allow strong fund flows in the coming year, thereby opening up a new window of opportunity for the Indian MF industry,” said Gopal Agrawal, deputy CIO and head (equity) at Mirae Asset Global Investments.
Meanwhile, asset management companies could be the direct beneficiaries of the move as they would be able to broaden their investor base while foreign investors can participate in the Indian growth story.
“The decision to allow foreign nationals to invest in local equity schemes of Indian MFs will have a very positive impact in the medium to long term. This move will allow a very important new category of investors into the industry. In this context, it is important to note that even at present foreign nationals do have an option to invest in offshore Indian equity funds, but this move will present before them a much wider range of well-performing investment avenues,” said BNP Paribas Mutual Fund MD Nikhil Johri.
The industry has also to examine the finer details, such as KYC norms, taxation and regulatory issues, before making plans to woo retail foreign investors. Factors such as the cost of hedging their currency risk and TDS provisions while remitting their capital gains also need to be looked into.
“Dovetailing the tax and regulatory parameters of these schemes to the requirements of multiple jurisdictions can be quite a challenge,” Daiwa Asset Management (India) CEO Piyush Surana.
“The move might provide the much required depth, but at the same time MFs might see a lot of volatility in the inflows/outflows, leading to under-performance. It could also impact other retail/institutional investors. Therefore, the modality of its implementation will need to be discussed before it is formalised,” said Sundaram Mutual MD T.P. Raman.
Nirav Panchmatia, founder CEO of AUM Financial Advisors, pointed out that there are practical challenges and issues, like the distribution model for the MFs for FIs, whether it would be through a distribution channel, or directly through MF firms, implementation of KYC norms, currency conversion, money-laundering and so on.