Of late, there has been significant interest among Indian investors to invest in international investments.
If you don’t know what FAANG stands for, then you are late to international investments. It is an acronym for Facebook, Amazon, Apple, Netflix, and Google (now known as Alphabet), currently the most popular and among the best performing technology companies globally.
Previously the market has been dominated by High-Net-worth Individuals (HNI) and has now started to gain interest among retail investors.
Over the years, the total outward remittances by Indian citizens falling in this category have witnessed a significant increase. From $4.6 billion in 2014, they went up by over three times to $13.7 billion in 2019.
The other reason for gained momentum is The Liberalised Remittance Limit (LRS) under which RBI has allowed enhanced amount from $125,000 to $250,000 in 2014 to foreign countries.
The international markets provide multiple benefits for investors like portfolio diversification, decoupling, and hedging.
In this article, I would be discussing the what-why-how of international investing.
What are international Investments?
Buying securities issued by companies or government outside your own country can be termed as International Investing.
An Indian investor buying stocks of Apple, Microsoft, Amazon, etc., in the US market, there are multiple ways and vehicles available to have international exposure. Like direct equity, Mutual Funds, etc.
To judge the performance OR Fundamentals of International Equity markets to make informed decisions, one can look at the Morgan Stanley Composite Index (MSCI).
MSCI is one index provider that is well known for its international indexes. Some of the company’s global indexes include the following:
- All Country World Index
- EAFE Index
- Emerging Markets Index
- MSCI Frontier Markets Index
Investors looking for comprehensive Global exposer can invest in a country’s world index like FTSE Global All Cap Index and the Vanguard Total World Stock Index Fund provided their Stockbroker to provide this facility.
Indian’s investment in foreign location has been primarily into Real Estate and has now gained traction in other asset classes like Equity, Alternative investments, etc.
Why International Investment?
Like any other investments, international investments also provide multiple benefits. Some of them are listed below…
We all know that we can not put all eggs in one basket. Through diversification in our investment, we adopt the same strategy.
One has to invest in multiple asset classes to arrest the investment portfolio’s downside, like Equity, Debt, Gold, Real Estate, and alternative investments.
Asset classes perform at various periods, and unlikely that all of them will give excellent. return simultaneously.
To build a diversified portfolio, you have to invest in those asset classes that have low correlation, i.e., those asset classes that do not move up or down simultaneously.
In the case of allocating money to the international market can also help you in achieving diversification.
In the study done by KUVERA, an online investment platform, the US stock market returns compared to the Indian Stock market over 20 years have a low correlation of only 34%.
It means that most of the time, both markets do not perform simultaneously, thus helping in hedging the investor portfolio.
Owning Quality business
Once you look outside the country, your investment universe will expand exponentially.
There are huge brands and business which have given extraordinary returns to investors. Like Google, Amazon, Microsoft from the US, Royal Dutch Shell, Volkswagen, HSBC from Europe, and much more.
Owning these companies in the long term and many upcoming companies like Tesla can positively impact investors.
If one considers, there is hardly any renowned software product company in INDIA or Automotive companies of repute, one can quickly look beyond country boundaries to buy in the portfolio.
The other Side – Risk in International Investment
Like any investment, there is risk involved in international investments, which one should be mindful of.
An investor will invest in business outside the native country either in dollars or destination country currency.
The prevailing exchange rate one invests or sells investment directly impact the return of the investment.
Suppose at time of investment the exchange rate for 1 dollar is, say, Rs 75.
And at the time of selling the international investment, the 1 $ = Rs 80.
It means the valuation of the portfolio will be impacted positively by Rs 5 irrespective of investment return.
In another example, At the time of selling, the 1$= Rs 70. The portfolio return will be impacted negatively by Rs 5 due to exchange rate fluctuation.
One has to be mindful of the exchange rate as this risk is nothing to do with your investment risk and adds to your international investment.
Every country has its local power dynamics. One has to be mindful of these aspects.
Political stability in the country directly translates into economic prosperity. IF the government is decisive and pro reformist, it draws international investors and companies’ attention to invest.
So while investing in any company internationally, we need to be mindful of macro situations like the country’s political land escape and its relationship with its neighbors.
The current administration and its handling of freedom of information/expression are also necessary as information is vital while making vestment decisions.
The investment laws one has to be also aware of as it impacts your investment decisions. For example, Tax laws, how much you have to pay and when you have to pay in taxes, liquidity clauses as when you can sell, Investment laws as a non-resident you can invest and where you can not, and more.
The management fees for investing in foreign markets / Asset classes are generally higher than domestic investments.
It is mainly due to the additional resources required by the companies managing those investments.
Investors have to keep in mind that it will not be suitable for investors to start their investment journey or have small asset portfolios.
Tax will eat away the significant return of your investment. An investor has to be mindful of the tax outgo on International Investments.
For instance, in the case of shares of foreign companies, the holding period should be two years for gains to be qualified as long-term capital gains (LTCG), taxed at 20% with indexation.
Dividend received are also taxed beyond ten lakhs received combined from Indian and foreign investments.
According to Indian tax laws, residents or ordinarily residents of India have to declare all foreign bank accounts and immovable assets in foreign countries in their income tax return.
The tax has to be paid on any income, including capital gains and rental income.
Though income earned from foreign investments is taxable in the individual’s hands, if taxes are paid in the country of origin, the investor may claim relief under the Double Taxation Avoidance Agreement, if any.
There are other factors to consider, do consult your tax advisor before considering investment decisions.
How to invest in International Markets?
It is advisable to take professional advice for investing in international markets. As the knowledge and authentic information, both can be a challenge for investors sitting faraway.
The preferred investment asset classes and vehicles to be considered for investment are as follows.
Mutual funds can help us in doing International investments efficiently.
There are two ways that mutual fund companies adopt to invest in foreign equities.
Through Feeder Funds / Fund of Funds
The domestic mutual funds companies tie-up with foreign mutual fund companies and invest in their schemes.
There are multiple schemes available based on a particular theme or market capitalization.
Both business entities charge management fees, i.e., domestic mutual fund companies collecting the funds and foreign mutual fund companies to manage the investment.
In INDIA, mostly all feeders’ funds are oriented to US markets. Click the link to see the details.
Few mutual fund schemes have a global theme where they invest in Global Indices floated by rating agencies like S&P, Morgen Stanley, etc
There is no limit for 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.
There are specific mutual fund schemes that directly invest in foreign equity markets. Some mutual funds which directly hold international stocks are ICICI US Blue-chip and Parag Parikh Long Term Equity Fund.
Real Estate Investment
In INDIA, buying real estate in a foreign location is popular.
It is the top investment option for Indians. Those looking to settle abroad start accumulating real estate in those locations, helping them in migration.
Parents whose children live in a foreign location prefer to buy real estate instead of the rented property.
Reserve Bank of India (RBI) regulations allow a resident Indian to invest up to $250,000 overseas each year under the Liberalised Remittance Scheme (LRS).
Real estate investment comes under LRS, so one must be mindful of the quantum of investment done under Real estate. The budget also introduced a TDS (tax deducted at source) for remittances above Rs 7 lakh.
Direct Equity investment
You can buy direct equity shares of foreign companies. Most of the brokers in INDIA have tied up with foreign counterparts.
The most popular market for Indians is US markets, where the majority of the action is.
Slowly Exchange Traded funds in INDIA have started catering to this market. Multiple ETFs replicate foreign indices and represent border markets like US Nasdaq, S&P DowJones, etc.
Foreign investment provides an adequate diversification to investors looking to build long term wealth.
The foreign investment required additional maturity and skillsets.
Investors have to have decent domestic investment experience and portfolio size.
Do understand that don’t invest in foreign assets just for the sake of diversification.
Over diversification can result in lowering of portfolio retunes as all investments cannot be giving excellent returns.
The goal should be optimizing your portfolio return through diversification.