Overseas investment: How it can make your investment portfolio shine

Investing in international markets allows diversification, ensures higher returns, and mitigates risks

Overseas investment How it can make your investment portfolio shine

The world is your oyster.

This idiom, evolved from a conversation in Shakespeare’s The Merry Wives of Windsor , is often used for motivational purposes. Essentially, it means the whole world is open to you when it comes to chasing your dreams.

That being so, if as an investor you sometimes dream of dabbling in global equity markets – especially given the uncertainty that the Indian markets face because of the pandemic – you may draw inspiration from Shakespeare to take the plunge and invest in the US, Europe, Asia, and elsewhere.

Simply put, the world is your oyster if you are into investing.

Can Indian citizens invest overseas?

In case you are wondering if it is legal for an Indian citizen to take money outside the country for foreign investments, the answer is yes, one can – legally; the Reserve Bank of India (RBI) allows us to do so.

Under the RBI’s Liberalised Remittance Scheme (LRS), an Indian resident individual can invest up to $250,000 overseas in a year (about Rs 2 crore at May 2021 rates) for investment in properties and direct equities abroad.

Do note that money taken out under LRS is also subject to conditions; there are areas you cannot invest in. You can find out more on that from the central bank’s FAQs on Liberalised Remittance Scheme: Reserve Bank of India - Frequently Asked Questions (rbi.org.in)

However, the RBI also allows you to have foreign investments, although any investment in a foreign company by an Indian individual is subject to RBI guidelines.

If you want clarifications on these guidelines, you may find the answer in RBI’s FAQs on ‘Overseas Direct Investments’, the link to which is here: Reserve Bank of India - Frequently Asked Questions (rbi.org.in)

How can one invest in foreign markets?

RBI allows foreign investments, which it calls ‘overseas direct investments’, by way of purchase of shares of a foreign entity, either by market purchase, private placement, or through a stock exchange, signifying a ‘long-term interest’ in that entity. Basically, there are three simple ways to invest in foreign stocks:

1. Open an overseas account with an Indian brokerage

For Indian retail investors, this is the easiest way to invest in foreign markets as many full-service Indian brokers such as ICICI Direct, HDFC Securities, Kotak Securities, Reliance Money, 5Paisa etc. have tie-ups with foreign brokers. They open your overseas trading account with their foreign partner-brokers, and you are ready to go.

Do remember that with this service there could be restrictions on certain investment vehicles or on the number of trades you can make, depending on the brokerage house.

Related: Diversify your equity portfolio by investing in stocks overseas

2. Open an account with a foreign brokerage

Some international brokerage firms such as Interactive Brokers, TD Ameritrade, Charles Schwab International Account etc. allow Indian citizens to set up an account and trade in US stocks and mutual funds. In fact, some brokers also have an office in India, where you can get your overseas trading account opened; e.g. Interactive Brokers (UK).

3. Buy Indian mutual funds and ETFs with global equities

The third option is to invest in those mutual funds/ETFs that invest in international markets, including emerging markets; this way, you indirectly invest in foreign equities.

This option is cost-effective as you won’t have to open an overseas trading account or maintain any minimum deposits, or invest a hefty amount. Compared to this, direct investing in foreign stocks can involve maintaining minimum deposits, which can sometimes be as much as $10,000.

Among the mutual funds that trade in global equities is Motilal Oswal S&P500 index fund, which invests in 500 listed companies in the US. Other such mutual funds and ETFs include ICICI Pru US Bluechip Equity, Motilal Oswal NASDAQ 100 ETF, and Edelweiss Greater China Equity Direct.

These apart, there are two gold funds in India – DSP World Gold Fund and Kotak World Gold Fund – that have international exposure in their holdings. Some gold ETFs too have international exposure.

Related: What investment decisions should you make during the global pandemic?

Factors to consider when investing overseas

There a few things to keep in mind if you plan to invest in foreign stocks. Read on to find out what they are.

Investment limits: As mentioned earlier, RBI’s Liberalised Remittance Scheme limits foreign investments by an Indian resident to $250,000 in a year, but do remember this limit is only for investment in properties and direct equities in foreign equity markets. However, when you open an overseas account in India, either with an Indian brokerage or a foreign brokerage, there is no limit on investment as you are not required to remit any amount outside the country.

High charges: While investing in international stocks, you will be transacting in foreign currencies. For instance, if you are trading in the US stock market, you will be paying the brokerage in USD. Consequently, brokerage fees could be higher that what is charged in India. Similarly, the annual/monthly maintenance charges may also be higher compared to domestic accounts.

Exchange rates: Your profits will always be subject to fluctuating currency rates. Let us assume you began investing in the US stock market when the rupee was 70 to the dollar, but when you sold stock the following year, the Indian currency strengthened, with 1 USD fetching Rs 68. So, you will have made some losses.

Tax considerations: You also need to keep in mind that your earnings will be subject to applicable taxes charged both under the US and Indian taxation laws. For instance, in India, capital gains from investment in foreign stocks or international mutual funds are treated like those from debt mutual funds. So, under Indian taxation laws, short-term capital gains tax will be applicable as per your income tax slab if you withdraw the principal investment along with capital gains before three years of investment; if held for longer than three years, long-term capital gains tax of 20% will be levied with indexation.

Market risks: Investing overseas mean the stocks you buy will be listed on foreign stock exchanges, and vulnerable to the local environment and issues such as local government policies. You have to be aware of these trends, as these will impact the share price of the companies you invest in.


What are the advantages of foreign investments?

Investing in international markets has three main benefits:

  • It allows diversification;
  • It ensures higher returns;
  • It mitigates risks.

Diversification: Portfolio diversification can happen on different planes: across and within asset classes, strategies, sectors, and geographies, with only the last type associated with investing overseas. Investing across countries is like buying bonds in India and equity in the US; basically, you are getting the best of the world markets to achieve portfolio returns and weathering out volatilities of one market. In the current pandemic situation, it makes sense, as the US markets have more or less ridden out the turmoil while India is still in the midst of uncertainties.

Higher returns: Foreign markets offer better opportunities to earn high returns. Tech giants such as Google, Microsoft, or Amazon report higher profits than their Indian counterparts on a regular basis. If you manage to invest in these firms and have other high reward stocks as well, you stand to increase the overall capital gains of your portfolio.

Risk mitigation: A collapse in any one sector in the domestic market can trigger a series of shutdowns and collapses, dragging down the Indian economy. Exposure to foreign investment instruments minimises the risk of capital loss at a time like this.

Which are the best international funds for 2021?

International mutual funds predominantly invest in equity, equity-related instruments, and debt securities of companies/entities listed outside India. Many of these funds are actually fund of funds schemes, whose underlying foreign funds invest in foreign markets

Here are the top 10 international mutual funds as on 27 April 2021, as per data released by Value Research:

1. Edelweiss Greater China Equities Offshore Fund: Fund of funds scheme investing in the Greater China Fund of JP Morgan Fund, which is an equity fund that primarily invests in companies with business activities in China, Hong Kong, and Taiwan.

  • One-year returns: 63.34%
  • Three-year returns: 26.89%
  • Five-year returns: 25.35%

2. Nippon India US Equity Opportunities Fund: This invests primarily in high growth stocks listed on US stock exchanges.

  • One-year returns: 47.98%
  • Three-year returns: 24.23%
  • Five-year returns: 19.79%

3. DSP US Flexible Equity Fund: Fund of funds that invests in BlackRock Global Funds, a US Flexible Equity Fund according higher weightage to large-cap growth stocks in the US.

  • One-year returns: 53.83%
  • Three-year returns: 20.53%
  • Five-year returns: 18.19%

4. ICICI Prudential US Bluechip Equity Fund: This invests in equity and equity-linked securities of companies listed on US stock exchanges; GDRs/ADRs issued by foreign and Indian companies, as well as securities of large-cap companies in the S&P 500 index.

  • One-year returns: 40.02%
  • Three-year returns: 22.66%
  • Five-year returns: 17.98%

5. Edelweiss Emerging Market Opportunities Fund: Fund of funds investing primarily in the Emerging Market Opportunities Fund of JP Morgan Funds.

  • One-year returns: 51.74%
  • Three-year returns: 13.81%
  • Five-year returns: 16.09%

6. Franklin Asian Equity Fund: Invests in Asian companies (excluding Japan but including India) with long-term growth potential without any sector or market capitalisation bias.

  • One-year returns: 50.59%
  • Three-year returns: 13.98%
  • Five-year returns: 15.75%

7. HSBC Global Consumer Fund: Fund of funds scheme investing in the China Consumer Opportunities Fund of HSBC Global Investments Funds, which aims to benefit from long-term consumption growth in China.

  • One-year returns: 41.86%
  • Three-year returns: 13.62%
  • Five-year returns: 14.67%

8. Kotak Global Emerging Market Fund: Fund of funds scheme primarily invested in MGF Asian Small Equity Fund Class I, which invests in small cap companies of the Asian and/or Pacific region. It also invests in iShares MSCI Emerging Markets ETF that tracks the MSCI Emerging Markets Index, consisting of the top five emerging market indices of China, South Korea, Taiwan, India, and Brazil.

  • One-year returns: 59.48%
  • Three-year returns: 12.09%
  • Five-year returns: 13.62%

9. Aditya Birla Sun Life International Equity Fund (Plan A): Invests in stocks across the globe with no regional bias and capitalises on the strengths of individual countries.

  • One-year returns: 38.83%
  • Three-year returns: 16.48%
  • Five-year returns: 13.40%

10. DSP Global Allocation Fund: This open-ended fund of funds invests in stocks, bonds, currencies, and cash equivalents in over 40 countries and 30 currencies.

  • One-year returns: 29.98%
  • Three-year returns: 13.85%
  • Five-year returns: 10.54%

Related: Financial products that NRIs can invest in India

Summary:
 

Fund name   Returns
 
 
  1 year     3 years   5 years      
Edelweiss Greater China Equities Offshore Fund 63.34 26.89% 25.35%
 
Nippon India US Equity Opportunities Fund 47.98 24.23% 19.79%
 
DSP US Flexible Equity Fund 53.83 20.53% 18.19%
 
ICICI Prudential US Bluechip Equity Fund 40.02% 22.66% 17.98%
 
Edelweiss Emerging Market Opportunities Fund 51.74% 13.81% 16.09%
 
Franklin Asian Equity Fund 50.59% 13.98% 15.75%
 
HSBC Global Consumer Fund  41.86% 13.62% 14.67%
 
Kotak Global Emerging Market Fund 59.48% 12.09% 13.62%
 
Aditya Birla Sun Life International Equity Fund (Plan A) 38.83% 16.48% 13.40%
 
DSP Global Allocation Fund 29.98% 13.85% 10.54%
 

Last words

Investing is all about creating wealth. When you invest overseas, you stand to earn in foreign currency – maybe in dollars if you’re tapping the US markets. Note that the rupee depreciated nearly 75% against the US dollar between 2008 (when a dollar was worth Rs 38.40) and 2018 (when it was worth Rs 70). Today, 1 USD is worth Rs 73. With dollar earnings, your spending capacity overseas also increases.

Overseas investments make your portfolio shine in other ways. Experts point out that a few foreign stocks in a portfolio act as a safety guard against turbulences in the domestic market. Moreover, it creates an opportunity to leverage the profitability of foreign firms. 

Disclaimer: This article is intended for general information purposes only and should not be construed as investment or tax or legal advice. You should separately obtain independent advice when making decisions in these areas. 

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