Why did SEBI ask fund houses to stop ETF inflows?

  • March 24, 2024
  • Posted by: OptimizeIAS Team
  • Category: DPN Topics
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Why did SEBI ask fund houses to stop ETF inflows?

Subject: Economy

Section: Capital Market

Context:

  • Markets regulator Securities and Exchange Board of India (SEBI) has directed mutual fund houses to stop accepting any more inflows in schemes that invest in overseas exchange-traded funds (ETFs), starting April 1, 2024.

More on news:

  • SEBI has issued these directions as inflows in these overseas ETFs have come close to the mandated investment limit of $1 billion in foreign ETFs.
  • The mutual fund industry has already reached 95 per cent or ($ 950 million) of the $1 billion limit. This is the reason why SEBI has asked mutual funds to temporarily stop accepting money in overseas ETFs

Why is SEBI’s direction to MFs ?

  • The capital market regulator has asked asset management companies (AMCs) not to accept funds in mutual fund plans that invest in overseas exchange-traded funds (ETFs) as the upper limit of $1 billion for these investments is close to being breached.
  • The regulator has asked to stop fresh inflows in such schemes from April 1.

What is the overall limit for mutual funds to invest in overseas ETFs?

  • There is an overall cap of $7 billion set by the Reserve Bank of India (RBI) for fund houses to invest in overseas stocks or mutual funds.
  • MFs are also permitted to invest up to $1 billion in overseas exchange traded funds.
  • Mutual fund industry has been demanding the RBI to hike the overseas investment limit of $7 billion.

What is an exchange traded fund?

  • An ETF, or exchange traded fund, is a marketable security that tracks an index, a commodity, bonds, or a basket of assets like an index fund.
  • Unlike regular mutual funds, an ETF trades like a common stock on a stock exchange.
  • The traded price of an ETF changes throughout the day like any other stock, as it is bought and sold on the stock exchange.
  • The trading value of an ETF is based on the net asset value of the underlying stocks that an ETF represents.
  • ETFs typically have higher daily liquidity and lower fees than mutual fund schemes, making them an attractive alternative for individual investors. 
  • ETFs are considered to be more tax efficient compared to other mutual fund schemes.
  • There are mainly five types of ETFs – equity ETF, bonds ETF, commodity ETF, international ETF and sectoral/thematic ETF.