When Individuals Can Invest Abroad, Then Why Do Mutual Funds Face a Cap?

Geographic diversification isn't merely useful for Indian investors—it's essential

- DHIRENDRA KUMAR

Picture this absurdity: You're standing at a crossroads where one path leads through a well-lit, regulated street with clear signposts, while the other meanders through uncharted territory with minimal oversight.

Conventional wisdom would suggest taking the first route. Yet when it comes to overseas investments, Indian regulators have made the safer, more regulated path artificially narrow while leaving the riskier direct route wide open.

The Reserve Bank of India has capped the mutual fund industry's overseas investments at $7 billion. This limit has remained unchanged for over 15 years, despite India's growing economy and foreign exchange reserves. Meanwhile, individual investors can directly remit up to $250,000 annually to buy foreign stocks through overseas brokers or invest in foreign mutual funds.

This creates a peculiar situation where an individual Indian can open an account with an American brokerage, buy shares, or invest in foreign mutual funds with minimal regulatory oversight from India. However, the same investor cannot access similar opportunities through an Indian mutual fund that operates under stringent domestic rules, maintains transparency requirements, and provides the safety net of Indian legal recourse.