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.

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