SEBI’s Directive on Overseas ETF Investment

  • 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.

Leave a Reply

Your email address will not be published. Required fields are marked *

And get notified everytime we publish a new blog post.