Overseas mutual funds turn negative after 15 months amid investment curbs, AI sell-off

The data points to pressure on the category from both sides: investors are pulling out money while fund houses have limited their ability to accept fresh investments.

MFs hit overseas investment limits

All fund houses that typically run overseas FoFs have stopped fresh intake into their overseas schemes. Baroda BNP Paribas Aqua FoF, which had been the last option for investors seeking to invest overseas, stopped accepting fresh lump-sum investments late last month.

This was after the likes of PGIM, Edelweiss, and Franklin Templeton had closed fresh intake into their overseas funds earlier in July.

“The biggest reason is the restriction on fresh investments, with AMCs such as PGIM, Motilal Oswal, and Edelweiss reaching their overseas investment limits and stopping or restricting new investments. Hence, as fresh money into these funds slowed, July saw outflows exceed inflows,” said Shweta Rajani, head of mutual funds at Anand Rathi Wealth.

The restrictions stem from the overseas investment limits applicable to the mutual fund industry. The industry has a combined limit of $7 billion for investments in foreign securities and a separate $1 billion limit for overseas ETFs.

This means fund houses cannot accept unlimited fresh money into overseas schemes even when investor demand exists.

Overseas appeal fades as AI rally reverses

Overseas markets had become a major draw for Indian investors as the AI-led rally delivered strong gains in markets such as South Korea, Taiwan and the US. Retail investors also joined the trend, with funds mobilised through overseas FoFs ranging between Rs 1,000 crore and Rs 2,000 crore a month earlier this year, until May.

The momentum has since weakened. South Korea’s Kospi index fell more than 22% in July after rising 101% earlier in 2026, adding to concerns about the sustainability of the AI-led rally. The decline was exacerbated by losses among younger, highly leveraged South Korean investors following regulatory changes in the country.

“All of them (AMCs with overseas FoFs) have seen redemption pressure due to the stuff happening in South Korea. That might have led to redemption pressure among the emerging market funds, thus leading to higher outflows,” said Deviprasad Nair, chief business officer at Helios Mutual Fund.

Indian equities offer alternative

Meanwhile, the Indian stock market gained around 2% in July, its best monthly performance since April. However, the Nifty 50 and Sensex remain around 9% lower so far in 2026.

Foreign investors returned to Indian markets in July after the AI-led sell-off, fewer negative shocks from West Asia and better-than-expected first-quarter corporate earnings. Foreign portfolio investors recorded positive inflows into Indian equities for the first time in four months.

Analysts believe the improving domestic market may also have encouraged Indian retail investors who typically allocate money overseas to direct more of their investments to Indian equities.

“Of course it is still important to diversify. But looking at the current geopolitical scenario, retail investors might have also put some of their money saved up for foreign investments into Indian equities,” a fund manager at a domestic AMC said.

“With domestic investors continuing to allocate to Indian equities and foreign investors returning, some of the money that could have gone overseas is naturally finding opportunities in the domestic market,” said Rajani of Anand Rathi.