The decision to allow foreign investors to invest in equity mutual funds has opened up a world of opportunities for Indian asset management companies. Direct equity fund investments from foreigners will widen the class of investors in Indian markets and beef up the asset bases of local fund houses, according to CEOs of leading asset management companies.
"Conceptually, it is a positive move for the industry," said Nikhil Johri, managing director, BNP Paribas Asset Management, adding, "The success of it will, however, depend on the level of KYC required while bringing in foreign investors, tax aspects, investment limits (if any) and such other important details," he said.
At present, only foreign institutional investors and sub-accounts registered with the market regulator Sebi and non-resident Indians are allowed to invest in mutual fund schemes. Sebi-registered foreign portfolio investors, on their part, do not have significant exposure to equity mutual funds as a result of their relatively small asset bases and difficulty in ‘snap-liquidation’ or redeeming a portfolio at high speeds without impacting the portfolio NAV.
The government has given a lifeline to equity mutual funds by allowing them to accept investments from foreign investors. Most asset managers, whom ET spoke to, believe that foreign investors - especially smaller funds and high networth foreign nationals - will have longer investment horizons than Indian investors who redeem their portfolios at the slightest downtrend or book profits at significant gain in market values. The mutual fund industry recorded a 6% fall in its AUM, as investors pulled out over Rs 16,000 crore from equity mutual funds last year.
"This is an opportunity which will bring in a lot of foreign money into the country," said Sundeep Sikka, CEO, Reliance Mutual Fund. "Once the rules are set, fund houses will start expanding the overseas distribution channels.
All said, we’ll have to comply with rules and regulations (of other countries) to sell Indian funds in overseas markets," Mr Sikka said.
Apart from domestic fund houses, small trust funds, which do not want to invest in India through FII route, will also benefit from direct investment policy adopted by government in the Union Budget. Most asset managers do not expect retail foreign investors to invest directly in Indian equity funds. They wouldn’t be comfortable with the idea of moving money from one country to another without a local mediator fund. Such investors will still prefer the feeder fund route, experts said.
"By allowing foreigners to invest in equity funds, the government is looking to attract qualified institutional investors," said Vijai Mantri, CEO, Pramerica Asset Management.
"Fund houses will market local funds to small endowments funds and pension funds, wanting to invest $10 - 25 million in Indian equities. They are not likely to sell funds to retail foreign investors," Mr Mantri said.
Funds for foreign investors will have to be packaged well to prevent losses from currency volatility. Such funds could be an expensive proposition considering the high hedging costs. Currency hedgers charge anywhere between 4 - 7% to hedge rupee-dollar contracts for an year.
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