Investment and diversification should be hand in gloves with each other. A concentrated investment in any category, even if it is the safest, is a loss to the investor. Your money should be spread across different kinds of investment to rule out short term fluctuations.
However, diversification is not just across asset classes: equity, debt, gold and the likes. Diversification can also be across geographical boundaries. An investment outside India expands options for wider diversification.
When we talk of diversification, international equity exposure does not rank high up in an Indian investor’s list. Not many of us prefer to invest outside or to put it differently; not many of us keep it as one of the options.
Nevertheless, interest among retail investors is catching up.
The number of folios for fund of funds investing overseas rose to 4.39 lakh folios in October 2020 as compared to 1.40 lakh folios from a year-ago period.
This is not an exhaustive reference to retail investor interest in foreign securities because there are more ways you can invest abroad than a fund of funds investing overseas. It is indicative of a trend that is slowly catching up.
While there is no clarity on why investors are stuck between how to invest outside India and actually taking the plunge, the interest is catching up at a slow pace.
Without further delay, let’s straight jump into the avenues that are open for Indian retail investors who want to invest abroad.
Avenue to Invest Abroad
These avenues will give you an idea to invest overseas from India.
In this article
Under the broader umbrella of mutual funds, there are various ways one can invest internationally.
1) Fund of funds
Fund of funds (FoFs) are mutual funds that invest in other mutual funds. In this context, fund of funds which invest in global funds gives you international exposure.
Overseas FoFs invest in a global mutual fund that invests in global equities. Their holdings comprise one global fund. However, overseas FoFs is one of the methods.
2) Mutual Funds with International Stocks
Some regular equity funds have domestic and international stock and fall under the sectoral/thematic funds category.
If you look at the holdings of these funds, you will see that the portfolio has a mix of Indian and foreign equities.
3) Index Funds
Index funds are funds that imitate a certain stock market index. There can be index funds that invest in global indices.
Motilal Oswal S&P 500 Index Fund is an example. This is the first index fund in India that tracks the performance of the S&P 500 Index, an American stock market index.
With an investment outside India, you get benefits of diversification and possibly higher returns as well. However, nothing can be said with certainty. There may be times when domestic markets may perform better than foreign markets. This is where diversification plays a key role.
ETFs or exchange-traded funds are funds that are traded daily on the stock exchanges. The units of an ETF are bought and sold on the exchanges, and the NAV of ETFs change real-time as per the market movements. They mostly track an index, and therefore most are index funds that are traded on the index. ETFs, in this context, could be invested in global funds as well.
5) Gold (Funds and ETFs)
There are a couple of world gold funds in India that have international exposure in their holdings. Only two funds are available in this context: DSP World Gold Fund and Kotak World Gold Fund. There are gold ETFs as well with international exposure. If you were wondering how to invest abroad from India and equity was not the only way out for it.
6) Direct Equity
You can also invest directly in shares of U.S. listed companies. Select brokers in India, including Groww, allow direct investment in U.S. stocks. Charges will depend on the brokers. Investing directly in foreign equities will require you to do the same amount of research or may even more because this is a cross-border investment. As compared to mutual fund options or ETFs, direct foreign equity might be more expensive.
7) Foreign Property
You may be able to invest in real estate in other countries depending on the rules and regulation of the desired destination. Investing in property abroad requires a lot more capital than other investment options. Real estate is not the most liquid asset, and this characteristic is common no matter where you invest.
Factors to consider
Here are the factors that you may look at before considering how to invest abroad from India.
There is no limit when it comes 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 is allowed to remit a maximum of $2.5 lakh per financial year.
Investing internationally will require a lot of research about the country, the funds, how the market behaves in that country and what are the general investment trends. Even though the basic principles of how equities work may be conceptually similar, there is a range of factors that are identical to different countries. Researching technical factors for another country where you did not grow up may require a lot more effort and time.
Macro- and micro-economic factors
Their fundamental policies, economic condition, central bank decisions, interest rates and many such macro and micro-economic aspects must be considered. Such factors are characteristic to each country.
For direct equity of foreign companies, the tenure has to be more than two years to qualify for long term gains. LTCG is taxed at 20% with indexation.
In case of dividends from owning foreign equities is taxed the same way as domestic equities from FY21. It is taxed at the hands of shareholders according to the tax slab.
International exposure acts as a hedge against domestic irregularities. 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.