Home bias is rationed in India

Friend showed me his portfolio yesterday. Eight funds. Large cap, mid cap, small cap, a little gold on the side. He was proud of it, and rightly.

So I asked how many countries were in it.

Long pause. One. Every rupee he owns is a bet on the same economy that pays his salary, prices his house and signs his bonus cheque.

That is home bias, and every textbook has the same fix. Own some of the rest of the world. Here is what the textbooks skip: in India that counter is rationed.

Of the 66 international funds on the shelf, 54 will not accept fresh money today. Twelve still take a SIP. One takes a lump sum. Not one of those closures is a verdict on the fund behind it.

The reason is a ceiling. Indian mutual funds may hold 7 billion dollars in foreign securities between all of them, plus 1 billion for overseas ETFs. Those numbers were set in 2008 and have not moved since. The industry crossed the line in January 2022 and every house has been frozen at whatever room it held that February. A fund reopens only when its own investors leave, or when global markets fall far enough to shrink what it holds.

So the doors still open ration you. Several cap a fresh SIP at Rs 5,000 a month. A 10 percent sleeve on a 50 lakh book works out to 100 months of that. Eight years to place one fifth of a decision.

Honest version: I am not telling you to fix this, because mostly you cannot. And home bias is not automatically a mistake. Your rent and your liabilities are in rupees. There is a real case for owning rupee assets.

But there is a difference between a concentration you chose and one you found out about. Diversification is not how many funds you own. It is how many different ways you are allowed to be wrong. On most Indian portfolios, mine included, that number is smaller than the app makes it look

The limits, in one place

The ceiling in the opening is written into SEBI's rules for mutual funds. The current Master Circular for Mutual Funds, dated 27 Jun 2024, sets an industry wide limit of 7 billion US dollars for overseas investment, with no more than 1 billion for any one fund house. Overseas ETFs have a separate industry limit of 1 billion dollars, with up to 300 million per fund house.

Seven billion dollars sounds large until you set it against the size of the industry and the number of investors who might want a slice. Once the industry reached the line, the only room for new money is the room existing investors leave behind.

How the door closed

1. 2008The 7 billion dollar ceiling is set

   The industry wide overseas limit for mutual funds reaches the level it holds today.

2. Jan 2022The industry reaches the ceiling

   Fund houses stop taking fresh money into overseas schemes beyond the room each one held.

3. Apr 2024Overseas ETF subscriptions paused

   Following a SEBI letter of 19 Mar 2024, schemes stop fresh subscriptions meant for overseas ETFs from 1 Apr 2024.

4. Jun 2024The limits are restated

   The SEBI Master Circular of 27 Jun 2024 carries the same 7 billion and 1 billion dollar limits forward.

There is a second route outside mutual funds. Under the RBI's Liberalised Remittance Scheme, a resident individual may send up to 2,50,000 US dollars abroad in a financial year for permitted purposes, which include buying overseas shares. It comes with its own paperwork, tax reporting and currency costs, and it is not a fund. It does exist, and it is not rationed by the industry ceiling.

How long a capped SIP takes

The arithmetic in the opening is worth running on your own numbers, because the answer surprises most people.

And the target keeps moving. If the rest of the Rs 50 lakh grows while the overseas sleeve fills Rs 5,000 at a time, the 10 percent target keeps rising ahead of it.

The free Learn module on gold, commodities and international investing covers the routes Indian investors use to hold assets outside India, their limits and their tax treatment, with a quiz at the end. For the size of the one country bet, read the one country bet.