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For the first time in my long career, I have been at the receiving end of calls from concerned clients. Let me explain why.
Our investment advisory practice gives the utmost importance to asset allocation, that is, the proportion of investment that should go into various asset classes, such as debt, equity, gold and real estate. The asset allocation for each client depends on her risk-taking ability, availability of resources, objectives, and the time available to achieve them.
We advise most clients to have some allocation to global securities. The logic for doing so is simple. The total market cap of all listed stocks in India is only around 3 per cent of global market cap. Indian Investors need to invest in foreign companies’ stocks to have a diversified investment base. They can take one of three routes for this purpose.
First, they can open an account with an overseas bank or broker. Money is remitted overseas using the Reserve Bank of India’s (RBI) Liberalised Remittance Scheme (LRS) which allows Indian residents to remit up to $250,000 overseas each year.
The second option is to invest in schemes of Indian mutual funds (MFs), which in turn invest in global equities, exchange traded funds, and MFs. In 2008, the RBI had given permission to Indian MFs to invest up to $7 billion (approximately ₹ 50,000 crore in today’s terms) in global securities.
Third, a new route for investing overseas has recently been announced in Gift City, Ahmedabad.
We have always recommended the second option to our clients for a variety of reasons. The regulatory structure for MFs in India is stable and well understood. Multiple choices are available within the country at competitive expense ratios (most importantly, small amounts can be invested at competitive expense ratios). Investors can avoid the double-taxation issues that surround foreign investments. A well laid down nomination process ensures ease of inheritance. And such investments don’t have to be reported as foreign investments in Indian tax returns, prompting unnecessary scrutiny by the tax authorities.
The $7 billion limit was barely used for about a decade. This option really took off in the past three years. Anecdotal data suggests $4 billion (nearly 60 per cent of the limit) was utilised in 2021 alone.
The MF route is here to stay and will grow. The regulators, too, view it positively. Hence, when the limit finally ran out towards the end of January 2022, it was expected it would be increased in a few days.
It has been about 45 days since most schemes shut their doors on fresh investments. No end to the imbroglio is in sight. The reasons for the delay are unclear. The RBI’s concerns, if any, are also not known. This delay is all the more perplexing since wellheeled investors can continue to invest via the LRS route.
When this issue had first cropped up, I had stuck my neck out and predicted an early increase in the limit, given India’s comfortable foreign exchange reserve position and many moves towards capital account convertibility. “We will surely increase the limits set in 2008 when our forex reserves were 40 per cent of today’s level, especially since MFs are such a well-regulated product,” I had told my clients.
This issue must be resolved soon if investors are not to lose faith in the continuity of our investment policy decisions. Further delays will leave doubts about the policy considerations or concerns that weighed on the RBI, and whether those concerns could arise again in the future.
The writer heads Fee-Only Investment Advisors LLP, a Sebi-registered investment advisor; Twitter: @harshroongta
(A slightly different version of this column first appeared in the Business Standard on March 07, 2022.)