Asset management companies (AMCs) adopt various structures. The most common is the feeder model, where an Indian scheme invests directly into an overseas fund or Exchange Traded Fund (ETF) that already tracks a global index.
Another structure is local replication, where the AMC creates an index fund or ETF in India and then invests in the international securities in the same proportions as the benchmark. There are also instances where an AMC may invest in an actively managed global fund abroad, or, less commonly, manage an international portfolio actively from India.
“In practice, most international offerings accessible to Indian investors are either feeder arrangements or replication models. Both methods aim to provide investors with access to global equity markets, although their operational mechanisms differ. The feeder structure depends on established vehicles abroad, while replication involves constructing the portfolio locally in accordance with the target index,” said Saurabh Bansal, Founder, Finatwork Investment Advisor, a SEBI RIA (Registered Investment Advisor).
According to Sebi’s framework, effective from February 1, 2022, the total overseas investment limit for the mutual fund industry was $7 billion, with each mutual fund house allowed a sub-limit of $1 billion within that overall cap.
The June 2022 Sebi letter and the AMFI communications simply permitted fund houses to resume subscriptions only within the remaining unused headroom of these limits, without raising the caps themselves. AMCs generally ceased accepting money in overseas funds after they exceeded the overall limit of $7 billion set by regulators.
The overseas investment limits set by regulators have always been closely linked to currency management rather than the benefits of international diversification. Large outflows into global markets can put extra pressure on the rupee, and the limits serve as a way to control this.
Bansal said that over recent years, we have observed these caps act like a tap that can be turned on or off depending on the current economic situation. Sometimes, mutual funds are told to halt new inflows, and when redemptions create space, some schemes reopen briefly, if US markets continue to rise and Indian investors show strong interest, regulators may prefer to keep these limits tight or even narrow the window further.
“For investors, this can translate into systematic plans being suspended, lump sum applications not being accepted, and funds temporarily holding higher cash balances. Such actions may lead to tracking errors or premiums on ETF units when access is restricted. However, the underlying case for global diversification remains unchanged. What varies is the timing of when investors can access these opportunities.”