Mumbai: Planning to launch schemes that invest overseas, Mutual funds are likely to get a lot more freedom in terms of investment options and limits. The government and financial sector regulators are working collectively to liberalise the norms that govern mutual funds. Likely to be finalized soon, the proposal envisages giving fund managers a lot more overseas investment options including debt securities not below the investment grade and possibly derivatives.

Presently, mutual funds’ total overseas investment is capped at $4 billion. The individual funds are facing a ceiling of $200 million within this. There are indications that the overall limit may double while the allocation to each mutual fund will be on a first-come, first-served basis.

Fund managers have very little to choose from, as far as investment options are concerned. As far as equity is concerned, they have to select between American depository and global depository receipts and equity of overseas firms listed on stock exchanges abroad. For debt, they can only invest in government securities or securities with the highest rating (AAA).

The finance ministry’s TOP officials and the Reserve Bank and the Securities and Exchange Board of India have discussed the details and a final notification is expected soon.

The liberalization is likely to help mutual funds diversify their asset portfolio. It’s also likely to capital outflows. According to a policy perspective, if mutual funds are allowed to invest more in foreign securities, it will help ease the pressure on RBI in managing excess inflows. This, in turn, will make the currency and inflation management much easier.