Ever dreamt of owning a piece of Google or Facebook? That would have been a great investment. Shares of Google (now Alphabet) have nearly tripled over the past five years, and that of Facebook have rocketed nearly 800 per cent in this period. The good news is that you can buy these shares though they are listed on US stock exchanges and not on Indian bourses.
Under the Liberalised Remittance Scheme (LRS) of the Reserve Bank of India, resident individuals may remit up to $250,000 in each financial year for permitted capital and current account transactions. These include investing in equities abroad. You may ask, ‘why run after overseas opportunities when the Indian stock market is booming’? Here’s why.
Diversification
Spreading your eggs across a few baskets is always a good idea. In portfolio management, this core principle, called diversification, helps reduce overall risk. So, in addition to investing in different financial securities including stocks in India, you could diversify your portfolio further by putting some money in international equity.
Not all markets do as well or as badly at the same time. In calendar year 2015, for instance, while the Sensex fell 5 per cent, the technology-heavy Nasdaq index in the US gained 6 per cent. In 2014, though, the Sensex had raced ahead of most other global indices.
The Indian market is going great guns now, but there is no certainty this will continue forever. Having investments in other markets can help shield your portfolio from volatility in a single market and improve overall returns.
Niche plays
Much as we would like, companies such as Alphabet, Facebook, Amazon, Apple or Tesla that are at the cutting edge of technology are hard to find in India. If you want a piece of such niche plays, you have to look abroad. Some of these companies take audacious moonshot bets that could pay off big-time in the future. If you have the stomach for such bets, you’ve got to look abroad.
If you foresee use of foreign currency denominated investments in the future — say, to fund higher education or buy a house abroad —investing overseas makes sense.
Risks and restrictions
But investing abroad entails higher risks and may not be everyone’s cup of tea. One, the information asymmetry could be high. Investing in equities anywhere comes with the risk of capital loss. Especially so in international equity investing, where you may not be up-to-date about the foreign economy, industry and company. This could leave you at a disadvantage and more susceptible to losses. Keeping abreast of happenings that impact your foreign investment is key to reducing this risk.
Next, there is currency risk. Your rupees get converted into a foreign currency while investing, and vice-versa while redeeming. If the rupee appreciates during this period, you lose and if it depreciates, you gain. Adverse currency movements, which can never be ruled out, could dent price gains on the foreign stock.
Currency risk can be managed by hedging with instruments such as futures, forwards and options. This, though, may not be easy for the common retail investor. Also, it does not make sense to hedge the currency risk if the investment in foreign currency is earmarked for a specific purpose such as higher education.
Transaction costs in foreign markets could be different from those in India. Besides brokerage, there could be costs such as statutory fees, currency conversion charges, exchange fees and taxes. There will also be fund management charges if you are taking the mutual fund route to investing overseas. Understand what and how much you will be paying before deciding to invest in foreign equity.
Make sure not to violate laws, Indian and foreign. The RBI allows Indian residents to invest in financial securities abroad but there is a bar on leveraged offerings such as margin products.
How to invest
There are two broad ways you can invest in foreign stocks — by yourself through brokers or through mutual funds.
Through brokers
A few Indian brokers such as ICICI Direct, SMC Global Securities and Religare Securities have tie-ups with brokers abroad to facilitate overseas investment for their customers. For instance, ICICI Direct and SMC Global Securities have tied up with Denmark-based Saxo Bank while Religare Securities has an arrangement with Bahrain-based Mubasher Financial Services. You can also open an account directly with foreign brokers such as Interactive Brokers and Saxo Bank.
After opening the account, you have to transfer funds from the local bank to the overseas account after submission of a few documents. Some brokers may ask for minimum initial deposit. You can then buy and sell stocks on the online platform of the overseas broker.
Investments are typically allowed across multiple geographies and markets. The brokerage rates vary with the country and exchanges. Also, there are generally minimum charges for transactions. Besides, the international broker will charge asset management and account opening charges. Going with an international broker directly rather than routing through a local broker may work out more cost-effective since it would mean one less layer of intermediation.
While selecting a broker for international trade, check on the products and markets being offered, the cost of transacting and transparency, and the sophistication of the trading technology used. Also, check whether the broker has prior approval from the RBI for schemes being marketed in India.
When investing through a broker, you are taking your own calls on the stock and taking on currency and other risks. So, do your homework. Have knowledge about the security being purchased and the currency you’re investing in.
Through mutual funds
You can also consider the mutual fund route to take exposure to foreign stocks. There are three ways to go about this. You can buy units of exchange traded funds (ETFs) or mutual funds listed abroad through your international broking account. Next, you can go for India-based feeder funds that invest in funds run by parent companies abroad or in India-based funds that invest solely in international stocks. You can also put money in local funds that invest a part of their corpus in foreign stocks.
Investing in foreign stocks through a local mutual fund can save you many hassles and risks. It can also be more cost-effective and tax-efficient. Funds that invest at least 65 per cent of the corpus in Indian stocks are categorised as equity funds; investors in such funds do not have to pay tax on capital gains if the units are sold after holding for at least one year.
On the flip side, as in any other mutual fund, you incur expenses including fund management charges that eat into returns. Also, you do not have the flexibility of selecting stocks, but have to go with the fund manager’s choice.
If you have a large corpus, invest regularly, seek flexibility in choices and asset classes, and have the knowledge to research and track your investments, opening an account directly with a foreign broker will be worthwhile. Else, the India-based mutual fund route to investing in foreign stocks may be the better option.