Don’t Put All Your Eggs in One Basket.
When it comes to investing, being invested in a single class or asset has lots of risks entangled with it. All the market gurus suggest diversifying the investment portfolio according to thy risk appetite. Like if you are young then your exposure to equity markets can be high compared to an elder person but being invested in just equities and that too in a sector or a company is a dreadful decision.
In a market like India we have many options to diversify while investing but still, we lack those companies that operate on the global level. Indian companies overly depend on the economy of India. Even the most valuable listed company, Reliance, does not have much presence outside India. This uncovers a distinct risk which we have to deal with when we invest just in India, i.e. country risk. Imagine a scenario where economies across the world are performing well, while India’s economy is lagging because of certain reasons. Here, no matter how diversified your portfolio is, you will not ride the growth story of the world. Diversification across the border is a must thing.
Alphabet (Google), Facebook, Apple, Microsoft, and companies like these are fundamentally strong and operates globally. Investment in these companies will make a portfolio strong, but in India, many of us are not aware how to invest in these companies, what are the benefits and what can go wrong or what are risks involved.
How to invest?
From India, a person can gain exposure to the foreign market directly or indirectly. By directly I mean buying the shares of a company and by indirectly, I mean to invest in the funds which invest in the foreign market.
Investing Directly
There are two ways in which you can buy the shares of a company listed in the foreign stock exchange.
First, is via a local broker of India who has tie-up with a broker of that country in which you want to invest. Check whether the broker with whom you have your DEMAT account has a tie-up with a broker in that nation and allows you to buy a share in a foreign nation. HDFC Securities and ICICI Direct have a tie-up with brokers across major countries. The major concern while you directly invest in the foreign is the brokerage fees and minimum amount to invest. The brokerage fees can be as high as $50 - $100 per transaction and minimum investment allowed can be more than $10,000.
Second, via the foreign broker operating in India. There are many brokers who are permitted to allow Indian citizen to invest in the foreign market directly, especially the US market. These firms provide various services to the investor in US market space, and they can open your account in 1 to 3 days. Major firms in this space operating in India are - Interactive Brokers, Saxo Bank, Swiss quote, and Charles Schwab.
Investing Indirectly
To gain the exposure of the foreign market, you can invest in mutual funds and the exchange-traded funds (ETFs) operated by many asset management companies. You can choose from many options according to your preference and the risk appetite. The advantage of investing indirectly is that you do not have to open a separate account and don’t need a hefty investment to start. You can start with as little as Rs. 500 just like other mutual funds.
Some Mutual Funds which focuses on the International markets are:-
Other Things to consider while Investing in Foreign markets: -
Exchange Rates and Currency Conversion Charges
Each time you do transaction to buy or sell the stocks overseas you will have to convert INR to the respective currency of that country and vice versa, which can attract conversion charges. These charges are different for different currencies pair and can hit your return from the market.
While investing in the companies of the other countries you are accepting the fluctuations that can occur in the price of Rupee with respect to the currency of that country. Like if the dollar depreciates your US company’s stock return will increase and while it appreciates your returns will fall because of currency factor.
Liberalized Remittance Scheme (LRS)
Under this scheme, Reserve of Bank of India allows Indian Citizen to remit a total of $2,50,000 to the foreign countries per financial year. LRS comes under FEMA (Foreign Exchange Management Act) guidelines and includes more sort of everything related to the foreign transaction, be it be an international trip, Foreign medical expense, foreign study expense, foreign investment, etc. So, before investments in a foreign country, consider your LRS limit.
Nations rules and regulation
When you invest in a foreign country, you will have to adhere to their policies, rules, and regulations. Sometimes it can cumbersome and your money can get stuck overseas with limited legal recourse options. Developed countries like the US and countries under the EU have transparent and friendly investment rules and regulations for foreign investors while a country like China does not.
Taxation
According to the IT Act, the taxability of the capital gains depends on the holding period of the asset by which it is classified either short or long term. Holding period greater than 24 months will be treated as a long term will attract 20% tax on gains with cost indexation benefit (Only the gains above inflation will be taxed). While the short-term gains will attract 30% tax.
Final Comments
Investment in the foreign can give a diversified portfolio with handsome returns. You can invest in your favourite promising company with a global presence. But just like any other investments, it will require due diligent research. There are many other factors which an investor will have to consider a like issue of time zones and different accounting principles, but with proper planning, a person can reap the benefits of the growth story of a country or a company.
Fin.
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Disclaimer: Investment is a tedious task and I am no one to suggest any investment idea to you. Please do your own research before investing in any asset class. My articles on LinkedIn or on my website www.shivamnag.com are only for educational and information purposes. My articles should not be treated as a basis of any investment. Ask your financial advisor before investing. I could have an account in mentioned broking firms and investment in the funds mentioned above but I am endorsing any of these. This and my other articles are also available on my LinkedIn.
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