We will cover why some mutual funds stop accepting new investments.

The News

Last week, Motilal Oswal announced the discontinuation of the new Systematic Investment Plan (SIP) registrations and SIP Top-Ups for two of its international schemes: the S&P 500 Index Fund and the Nasdaq 100 Fund of Fund.

Interestingly, this isn’t the first time we’ve seen such a move. Back in October 2024, DSP Mutual Fund also temporarily suspended fresh investments in some of its international schemes.

If you observe, on both occasions, mutual fund houses paused new investments in their overseas schemes.

Today, let’s dive deeper to understand why mutual funds take such steps and what triggers these investment suspensions.

The regulation on overseas investing

The RBI has set some rules on how much money can be invested abroad. There’s a limit for the entire mutual fund industry of $7 billion.

Additionally, each fund house also has its own cap of $1 billion. Here’s how it works.

Industry Cap

The $7 billion limit applies to the total overseas investments made by all mutual fund houses combined.

Fund House Cap

Each mutual fund house can invest up to $1 billion in overseas ETFs.

These limits do not reset annually and reflect the cumulative investments made by the industry at any point. So when a mutual fund or an industry combined is about to breach these limits, they stop accepting new investments.

For example, following SEBI’s order, all mutual funds stopped accepting new investments in overseas ETFs starting 1st April 2024, as the limit was about to be breached.

Other factors for stopping fresh investments

1. Overvaluation

Investing in overvalued stocks could result in poor returns. So, to protect existing investors from poor returns, mutual funds may pause new SIPs.

2. Lack of Suitable Investment Ideas

Fund managers may stop new SIPs if they can’t find good investment options. Holding too much cash can hurt the fund’s returns, so they prefer to wait for better opportunities.

For example, in March 2024, ICICI Prudential Mutual Fund stopped accepting any fresh investment via lump-sum mode in its small cap and mid cap funds, citing overvaluation concerns.

Earlier this year, SBI Mutual Fund, Nippon India Mutual Fund, Tata Mutual Fund, and Kotak Mutual Fund also placed restrictions on fresh investments in small cap funds.

To Conclude

While mutual funds may stop accepting new investments for various reasons, these pauses are usually temporary. They are designed to protect both existing investors and the fund’s overall health.