Global Diversification: What Still Works and What Doesn't

With most global MFs closed to fresh inflows, investors eye combo funds, ETFs and Gift City

- Sashind Ningthoukhongjam

Diversification is the only free lunch in investing," famously said Nobel Prize-winning American economist Harry Markowitz. One way investors can diversify their investments is by allocating part of their portfolio outside India. However, many mutual funds in India having international exposure are closed to new subscriptions due to regulatory limitation.

In February 2022, the markets regulator directed asset management companies to stop accepting fresh inflows into international mutual funds because the industry had exhausted the overseas investment limit of $7 billion set by the Reserve Bank of India (RBI).

The Securities and Exchange Board of India (Sebi) has allowed new investments in international schemes, but only to offset redemptions.

Each AMC had a $1 billion overseas investment limit. However, if XYZ AMC had $600 million invested overseas when the industry breached the $7 billion limit in 2022, then that became its new upper limit. If any redemption occurs and the international exposure comes down to $400 million, then the AMC can accept inflows of up to $200 million to offset the shortfall.

There are 61 international mutual fund schemes, showed data from BSE Star MF. Of those, 31 funds are closed for lump sum investments and 32 for systematic investment plans (SIPs).

Most funds that invest in the US are closed to new investments as their investment quota has been breached quickly due to high investor demand.

Combo funds If investors want to diversify into an international market but are unsure how to do it, they can consider funds that hold a mixture of domestic and global equities. Funds like Parag Parikh Flexi Cap Fund and DSP Value Fund have exposure to both international and domestic securities.