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Tokyo. Japan’s hottest-selling mutual funds could see a slowdown in their explosive growth due to increased regulatory scrutiny at home and an uncertain outlook for the currency of a nation half a globe away.

These funds, loosely referred to as ‘double-decker’ funds, bundle high-return assets, such as junk bonds, and high-yielding currencies, mainly the Brazilian real.

They have been the rage among Japanese investors in the past two years in an environment of persistently low returns. They have drawn massive inflows and their assets now make up nearly 15 percent of the $840 billion Japanese mutual fund industry, in less than three years.

This rush of money, especially into the currency of Brazil, which unexpectedly cut interest rates late last month, has got Japan’s Financial Services Agency worried.

Double-decker funds invested in the real accounted for 60 percent of the segment’s total assets, as exposure to fast-growing Brazil, with an appreciating currency, was a natural choice for Japan’s savers. But there are signs a slowdown may be looming.

“Inflows into the real-linked funds may slow down,” said Genzo Kimura, a bond fund manager at STB Asset Management. “Their performance has been hit by falls in the real and the outlook is not necessarily convincing as Brazil may ease further.”

Japan households, with some $15 trillion in personal assets, have been diversifying their portfolio, seeking higher-yielding instruments with steady monthly dividends as domestic interest rates remain pegged near zero and as Tokyo stocks have struggled.

Double-decker funds were first launched in 2009 by Japan’s top money manager Nomura Asset Management. These funds initially invest in high-yielding assets such as equities, bonds, gold and real estate investment trusts. The income from these are then invested in currencies such as the Brazilian real. Foreign exchange derivatives are used to magnify those bets.

The funds enable investors to collect income from the original asset and from currencies, which make it possible for them to receive high monthly dividends. Nomura’s funds, which combined US high-yield bonds and currencies such as the real and the Turkish lira, quickly became popular, prompting rival fund managers such as Mitsubishi UFJ Asset Management and UBS Global Asset Management to follow suit.

Returns on a few of these funds have been as high as 60 percent over the past year, versus a flat performance for Japan’s main stock index over the same period.

A total of 415 such funds have been launched in Japan and their assets added up to 8.8 trillion yen ($114 billion) as of end-August, data from Lipper, a unit of Thomson Reuters, showed. That pace may be difficult to sustain.

The FSA has expressed concern to asset management companies about Japanese households’ large exposure to the real, industry sources said, forcing some asset managers to drop plans to launch new products linked to the Brazilian currency.

“We are trying to structure funds that are not linked to Brazil because we are worried about the FSA,” said a senior executive at a Japanese money manager, who did not want to be identified because of the sensitivity of the matter.

The funds are also facing new restrictions on how they are sold to investors. The FSA, the Japan Securities Dealers Association (JSDA) and the Investment Trusts Association are requiring distributors to provide more disclosures when they market double-decker funds and dividend-oriented products.

“We are doing this as a precautionary measure. There is a potential danger as these products are very sophisticated,” said Koichi Hirata, executive director at JSDA.

“These are the main products in the mutual fund market. So it is very important to make sure that investors understand risks and to remove any misunderstandings,” Hirata added.

The FSA emphasized it is not planning to impose restrictions on structuring of new products.

A slowdown for the segment may have already begun, recent data suggests. Assets of double-decker funds that invest in the Brazilian currency shrank by 3.6 percent to 5.3 trillion yen in August from a record 5.5 trillion yen a month earlier due to the poor performance of high-yield investments after the European debt crisis intensified, Lipper data showed.

Reuters