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Still A Long Way To Go

Despite the decision to allow foreign investors to invest directly in Indian funds, don't expect a flow of funds anytime soon…

For the mutual fund industry (though not investors), the headline moment of the Union Budget was surely the decision to allow them to access foreign investors directly. Initial reactions were that not only could this be an important new market for India’s mutual funds, it could also enhance the flow of foreign funds into Indian markets.

Certainly, that was way the Finance Minister announced it in the budget speech. What he said was, “Currently, only FIIs and sub-accounts registered with the SEBI and NRIs are allowed to invest in mutual fund schemes. To liberalise the portfolio investment route, it has been decided to permit SEBI-registered Mutual Funds to accept subscriptions from foreign investors who meet the KYC requirements for equity schemes. This would enable Indian Mutual Funds to have direct access to foreign investors and widen the class of foreign investors in Indian equity market.”

However, this goal may not be achieved to any meaningful extent. To enhance money flowing in from abroad in to Indian equity, this route must open access to and attract a new class of investors who would otherwise not have invested in India. This is unlikely. Foreign investors who are interested in India already have access to a large number of off-shore funds that invest in India. These are widely available in all major financial markets and are aggressively marketed by financial advisors and distributors in those markets.

As per data available with Value Research, there are no fewer than 157 such funds currently. These range from funds from standalone Indian fund houses like UTI and Kotak, those run by foreign fund managers which have a presence in India like HSBC, Fidelity, Franklin Templeton as well as many from other foreign financial firms. This is not a small business—such funds manage at least 50 billion dollars currently which is higher than all domestic equity funds put together. The largest such fund is one run by HSBC which manages 7 billion dollars—many times bigger than the largest Indian domestic equity fund.

Can the size and shape of this market become significantly bigger because the Government of India has opened up a new route for investments in India? According to what I’ve heard from people in the business, not by much and not in the short or the medium term. If you live in any country with a reasonably sophisticated financial industry, then you already have access to funds that invest in India. From the perspective of a potential investor who may be interested in Indian equities, nothing much changes. In any case, India and other emerging markets are not core investments for anyone elsewhere in the world. No end-user’s portfolio is made up of a majority of Indian stocks. India, at best, is a garnish on top of equities from the major western markets. This won’t change in the foreseeable future.

What might change eventually is the ease with which financial intermediaries operating in those markets can now get to offer Indian funds to their customers. However, for that to happen, Indian AMCs will be going through the effort of complying with the regulatory framework of those countries. This will take time and effort and each AMC will make its own cost-benefit calculations about doing so.