Foreign entities will now be able to invest directly in mutual funds, which will increase the fund flow into capital markets.

The fund houses will have to ensure know-your-customer (KYC) norms before seeking investment from overseas investors, Finance Minister Pranab Mukherjee said while unveiling the Budget for 2011-12.

“To liberalise the portfolio investment route, it has been decided to permit SEBI registered mutual funds to accept subscriptions from foreign investors who meet the KYC requirements for equity schemes,” he said.

The move would enable the sector to have a direct access to foreign investors and widen the class of foreign investors in the Indian equity market.

At present, foreign institutional investors (FIIs) and NRIs are allowed to invest in MFs.

Experts believe the proposal will benefit Indian stock market, by attracting more overseas funds.

“This would be positive for India in conducive market environment,” IDBI Federal Life Insurance CIO Aneesh Srivastava said.

The average assets managed by the MF industry, consisting of 40 players as of December 31, 2010, was Rs 6,75,377 crore.

“We hope that these are stepping stones towards further participation in managing long-term assets across the savings and investment spectrum,” said Ashu Suyash, Country Head & Managing Director of Fidelity International.

“The proposed entry of FII investment into the MFs space will allow strong fund flows in the coming year,” Mirae Asset Global Investments Deputy CIO and Head Equity Gopal Agrawal said.

However, ING Investment Management India said that the practicality of complying with the KYC norms would be a challenge for the sector.

“We expect funds with foreign parentage to possibly gain more as distribution would be a key in this case. One issue that needs to be resolved is practicality of complying with the KYC norms,” ING Investment Management India CIO Ramanathan K said.

Further, the Budget proposed levying additional income tax at a higher rate of 30 per cent on income distributed by debt funds to a person other than individual or HUF.

“Allowing foreign individual investors in domestic funds is a positive. However, increase in dividend tax in debt funds would be a negative,” Ramanathan said.