- SEBI has directed mutual fund houses to prohibit new inflows into schemes that invest in offshore exchange-traded funds (ETFs) from April 1, 2024.
What are exchange-traded funds (ETFs)?
- ETFs are marketable securities that track a variety of assets, such as indexes, commodities, or bonds, and trade on stock exchanges alongside traditional equities.
- ETFs were first introduced in India in 2001.
- ETF types include equity ETFs, bond ETFs, commodity ETFs, foreign ETFs, and sectoral/thematic ETFs, which appeal to a variety of investment preferences.
Market dynamics of ETFs
- ETFs can be bought and traded on stock exchanges like conventional equities, unlike mutual funds.
- The traded price of an ETF fluctuates throughout the day, just like any other stock, as it is purchased and sold on the stock exchange.
- An ETF’s trading value is determined by the net asset value of the stocks it represents.
- Individual investors are drawn to these funds because they provide greater liquidity, lower costs, and tax efficiency than typical mutual funds.
Reasons behind SEBI’s Directive
- SEBI imposed the Cap Proximity Directive because to the mutual fund sector exceeding 95% of the $1 billion investment limit in offshore ETFs.
- Temporary Measure: SEBI’s regulation is intended to temporarily reduce inflows into certain schemes until the investment limit is amended or additional restrictions are introduced.
- Existing Caps: Mutual funds are now subject to a $7 billion total ceiling on investments in overseas equities or mutual funds, with an additional $1 billion limit on ETFs.
Source: https://www.livemint.com/mutual-fund/mf-news/sebi-directs-mutual-funds-to-suspend-fresh-subscriptions-in-overseas-etfs-from-april-11711022942150.html