Now Qualified Foreign Investors can invest in Indian Mutual Funds!

By | May 12, 2012

With the Finance Minister Pranab Mukherjee’s move to introduce Qualified Foreign Investors in the budget for the fiscal year which commenced on April 1, is said to attract stable funds from retail foreign investors on a long term basis. With the relaxation in the government norms, this is seen as a good boost to the economy since with the inclusion of foreign investors, more inflows can be expected. Most Financial Advisors agree that with the inclusion of Qualified Financial Investors (QFIs) leads to a stable growth of the economy compared to the investments made by the Foreign Institutional Investors (FIIs).

The investments that come in from the Foreign Institutional Investors (FIIs) increase the volatility of the market mainly because of their short term behavior. Also, QFIs will have to comply with the KYC procedure and they should strictly adhere to it so as to keep a track of where exactly is the money coming from and where it is being invested. This allows the government to be watchful of any mal practices like the circulation of black money etc, can be scrutinized.

If you are a foreign investor, you are provided with the freedom to invest directly and buy Indian mutual funds units a cumulative of about $10billion per year. But first you need to attain the status of being a Qualified Financial Investor (QFI).

Who are QFIs?

Qualified Financial Investors are those investors of foreign nationality, and have produced sufficient proof to invest in Indian Mutual funds in India. SEBI has published the eligibility criteria according to which, if the foreign investor has managed to produce correct financial records as to how and where is the money coming from. This will help the government with KYC procedure and help in tracking down any money laundering cases. Also, you need to ensure that you do not have any minor debt cases like repayment of home loan or personal loan etc, if you’re a medium income investor, and wish to invest in India.

Prior to this move, only FIIs, NRIs and other sub accounts that have been registered with the Securities Exchange Board of India (SEBI) were allowed to invest their funds in Mutual Funds in India. Apart from this, only those Qualified Financial Investors (QFIs) who belong to the Financial Action Task Force (FATF) compliant jurisdictions along with which SEBI has signed Memorandum of Understandings under the International Organization of Securities Commissions (IOSC) can invest in Mutual Fund schemes.

Financial Action Task Force (FATF) with a membership of 34 countries, is an international body that aims to combat money-laundering and terrorist financing

What is the investment procedure?

There are two ways of investing in Indian mutual funds:

By opening a demat account with SEBI-registered depositories who hold units on the investors behalf and manage their transactions

And eligible investors will be able to place orders with a foreign depository for buying units on their behalf.

This depository unit will in turn place the order with an Indian custodian bank which will purchase the units and keep them with itself. The foreign depository will then issue Unit Confirmation Receipts, or UCRs which are similar to participatory notes, to investors against the units.

FATF is an international body that aims to combat money-laundering and terrorist financing and only those QFIs which are compliant to this jurisdiction and with which SEBI has signed MoUs under the International Organization of Securities Commissions can take advantage of this preposition.

The challenges

To attract foreign investors, Indian Mutual Fund houses need to raise their standards of transactions and match with their expectations.

What is basically required for the Indian financial sector is to promote financial inclusion; promote investment from people in the rural areas and the Tier 3 category, in order to strengthen domestic markets.

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