The Indian exchange control rules govern the overseas investment of Indian citizens. The Government of India and the Reserve Bank of India released a new framework on August 22, 2022, which offers better clarity, covers a more extensive range of economic activity and contains updated reporting criteria.
We think that every Indian investor should use every opportunity to invest overseas to diversify their portfolio and lower the risk associated with currency and a single country's developing market economy.
Offshore investing opens up the possibility of global diversification and offers exposure to some of the essential businesses and economies on the planet and to market segments unavailable in India.
This blog will jump into the avenues open for Indian retail investors who want to invest abroad, so read on!
The following avenues will give you an idea to invest overseas from India-
Suppose Indian individuals do not want to invest directly in Foreign Entity Shares. In that case, they might consider participating in international Mutual Funds schemes, which have exposure to international markets, and invest in Foreign Equities.
Several foreign Exchange-Traded Funds provide access to the NASDAQ and other critical global indexes. The investments would be under the total LRS limit, and there would be no reporting need under the new regime.
Resident Indians can invest in shares of international corporations listed on overseas stock markets with less than 10% holding. Still, they cannot control the foreign company where the investment is made.
Resident Indians can open an overseas trading account with an Indian broker that has a tie-up with an international broker, such as ICICI Direct, HDFC Securities, Kotak Securities, and Axis Securities, or they can open an account directly with a foreign broker that has a presence in India, such as Charles Schwab, Ameritrade, Interactive Brokers, and so on.
ETFs, or Exchange-Traded Funds, are funds exchanged on stock markets daily. ETFs, in this sense, might be invested in worldwide funds. Therefore, you do not need to have a trading account with an international broker.
ETFs may be purchased through local and foreign brokerage firms, and the process is similar to mutual funds. When investing in EFTs, one must exercise prudence; these funds must be registered with the SEBI. Many unscrupulous people urge you to invest in ETFs, so proceed cautiously.
In terms of benefits, ETFs are a terrific investment since they decrease training risk by simply replicating the movement of the index. Another advantage of investing in ETFs is that the fee ratio is much lower than in mutual funds.
Index Funds are investments that mimic a particular stock market index. In addition, indexation and index Funds that invest in worldwide indexes are possible.
As an example, consider the Motilal Oswal S&P 500 Index Fund. This is India's first Index Fund that tracks the performance of the S&P 500 Index, a stock market index in the United States.
Investing outside of India provides benefits such as diversity and maybe greater profits. Nothing, however, can be claimed with confidence. Domestic markets may do better than international ones at times. This is when variety comes into play.
You can also invest directly in shares of publicly traded corporations in the United States. Select Indian brokers, notably Groww, enable direct investing in US equities. The brokers will determine the fees.
Investing directly in foreign shares would need the same level of study, if not more because this is a cross-border investment. In addition, direct Foreign Equities may be more expensive than mutual funds or exchange-traded funds.
Depending on the laws and policies of the targeted location, you might be permitted to invest in Real Estate there. However, more money is needed than with other investing choices to purchase property abroad.
No matter where you invest, real estate does not have the highest level of liquidity among all investments.
Indian citizens who want to invest in a foreign market and receive a consistent income stream can do so by purchasing listed bonds issued by foreign governments or listed corporate bonds issued by foreign companies.
The investments in listed Debt Products would be covered under the LRS limit. Therefore, there is no reporting need under the new framework, similar to investments in overseas stocks and listed debt securities.
Here are the factors that you may look at before considering how to invest abroad in India-
There is no limit to investments in FoFs, as you are not required to remit any amount outside the country for investment.
You can invest in FoFs through asset management companies operating in India. For investment in properties and direct equities abroad, a resident Indian can remit a maximum of ₹2.5 lakhs per financial year.
Investing internationally will require a lot of research about the country, the funds, how the market behaves in that country, and the general investment trends.
Even though the basic principles of how equities work may be conceptually similar, a range of factors is identical in different countries. Researching technical aspects in another country where you did not grow up may require much more effort and time.
Their fundamental policies, economic condition, central bank decisions, interest rates, and many such macros and micro-economic aspects must be considered. Such factors are characteristic of each country.
For direct equity of foreign companies, the tenure has to be more than two years to qualify for long-term gains. In addition, LTCG is taxed at 20% with indexation.
In case dividends from owning foreign equities are taxed the same way as domestic equities from the financial year. It is taxed at the hands of shareholders according to the tax slab.
International exposure acts as a hedge against domestic irregularities.
Therefore, tax rules in cases of property investment become crucial. For other forms like mutual funds and direct equity, the impact is much lesser, but when it comes to real estate, knowledge of policy framework and taxes becomes very important.
Disclaimer: This blog is solely for educational purposes. The securities/investments quoted here are not recommendatory.