Why International Mutual Funds Are Shutting Their Doors to Fresh Investments Again

Investors looking to put money into overseas mutual funds are running into an old problem once again.
Over the past few weeks, several fund houses have either stopped accepting fresh investments or introduced strict limits on international schemes. 

Axis Mutual Fund has paused new lump-sum investments and fresh SIP registrations in some of its global funds. Nippon India Mutual Fund has taken similar steps for its Taiwan and Japan-focused schemes. Kotak Mahindra Mutual Fund, meanwhile, has capped fresh investments at ₹1 lakh per PAN in a month.

Invest in Indian Markets and Unlock Future Potential With 5paisa!

Open Account Now

The move has left many investors puzzled. After all, this is not a case of poor performance or rising losses. In fact, several international funds have delivered decent returns over the years. The real issue sits elsewhere. It has more to do with regulation than market performance.

A Limit Set Years Ago Is Now Becoming a Problem

At the centre of the issue is a cap on overseas investment for the mutual fund industry made by the Reserve Bank of India (RBI). 

Indian mutual funds can collectively invest up to $7 billion in foreign stocks and securities. There is also a separate limit of $1 billion for overseas exchange-traded funds, or ETFs.

The catch is that this limit is not new. The RBI introduced the $7 billion ceiling back in 2008. At the time, the mutual fund industry was much smaller, and overseas investing was still a niche idea for most retail investors.

A lot has changed since then.

Today, investors are far more aware of global opportunities. Many want exposure to companies listed in the United States, Europe and other developed markets. The popularity of themes such as artificial intelligence, global technology stocks and international diversification has only added to that demand.

The problem is that while investor interest has grown sharply, the industry-wide limit has largely remained the same.

This Has Happened Before

Anyone who follows the mutual fund industry closely will know that this is not the first time international funds have faced restrictions.

Back in February 2022, the industry hit the $7 billion ceiling for the first time. Fund houses were then asked to stop accepting fresh subscriptions into overseas schemes.

A few months later, regulators allowed some flexibility. Funds could once again take fresh money, but only if there was room available within their allocation. In practical terms, this meant new investments could come in only when existing investors redeemed their units.

The arrangement worked for a while, though it was never a long-term solution.

Over the next couple of years, some fund houses reopened certain schemes for limited periods. Others accepted money only in small quantities. The restrictions never fully disappeared.

Now the issue has resurfaced. Demand for international exposure has picked up again, and several AMCs have found themselves brushing against the regulatory ceiling.

Why Regulators Are Careful About Overseas Investments

For many investors, the obvious question is simple. If people want to invest abroad, why not allow it?

The answer lies in foreign exchange management. When an investor buys units of an international mutual fund, the transaction starts in Indian rupees. The fund house then converts those rupees into foreign currency before investing overseas.

If large sums of money move out of the country, regulators need to keep an eye on the impact. Foreign exchange reserves, currency stability and capital flows all become important considerations.

This is one reason the RBI prefers to keep a limit in place. The cap helps regulators monitor how much money leaves the country through mutual fund routes.

That does not mean overseas investing is discouraged. It simply means there are boundaries around how much can be invested through domestic mutual fund structures.

What It Means for Investors

The impact is different for new and existing investors.

For someone planning to start investing in an international mutual fund, the options are now limited. In many cases, fresh applications are no longer being accepted. Some schemes have imposed investment caps, while others have shut their doors altogether.

Existing investors are in a better position. Their money remains invested, and their portfolio will continue to move in line with the underlying global markets. However, adding fresh money may not always be possible.

The SIP situation is slightly more complicated. Some fund houses are allowing existing SIPs to continue, while others have imposed restrictions. Investors should check the latest communication from their AMC before assuming that a scheduled investment will go through.

One thing has not changed. Investors can still redeem their holdings whenever they wish.

Other Ways to Invest Overseas

The restrictions apply to international mutual funds operating under the industry-wide overseas investment limit. They do not close every route available to investors.

One option is the RBI's Liberalised Remittance Scheme, better known as LRS.

Under this framework, resident individuals can remit up to $250,000 abroad in a financial year. Investors often use this route to open overseas brokerage accounts and buy foreign shares or global ETFs directly.

Another route has emerged through GIFT City.

Several fund houses have launched international investment products through entities based in Gujarat International Finance Tec-City. These structures operate differently and do not rely on the same industry-wide overseas investment pool.

As a result, they have attracted growing interest from investors who want global exposure despite the restrictions facing traditional international mutual funds.

That said, these products may come with higher minimum investment requirements, making them less accessible for some retail investors.

Conclusion

For now, the industry is waiting for clarity from regulators.

Fund houses have been pushing for a revision of the overseas investment limit for quite some time. Their argument is that the mutual fund industry has expanded dramatically over the last two decades, while the cap has remained largely unchanged.

Whether regulators decide to increase the limit remains uncertain.

Until then, investors may continue to see temporary restrictions whenever demand for international investing rises sharply. Existing investments are not affected, but getting fresh money into overseas mutual funds is becoming increasingly difficult.
For investors seeking geographical diversification, the desire remains strong. The challenge, at least for now, is finding enough room within the rules to make it happen.