Mumbai: Indians can now invest up to $100,000 (Rs42 lakh) a year in overseas markets, in stocks, commodities, real estate and other instruments.
Apart from helping individual investors diversify their portfolio and spread risks some more—the previous limit was $50,000—the move is expected to encourage those who had stayed away from investing in overseas instruments because $50,000 was insufficient.
“Lot of our high net-worth clients were sitting on the sidelines as the $50,000 limit was too less for taking an exposure in the future contracts of various commodities like gold, silver and copper,” said Mohan Natarajan, director of Kotak Commodity Services Ltd.
A little less than four months ago, the Reserve Bank of India (RBI) increased the limit on overseas investments by Indians to $50,000.
In addition to the enhanced limit on investments, RBI has said investors can enter into forward currency contracts up to an annual limit of $100,000. And it has raised the aggregate limit on foreign investments by Indian mutual funds to $4billion from $3 billion.
The new limits make it possible for a family of four to invest or spend up to $400,000 (Rs1.68 crore) in buying foreign stocks, commodities, real estate or mutual funds.
Most Indian banks and financial services firms are yet to launch products that specifically cater to those who wish to invest overseas.
The few that have, however, expect the increased limit to have a positive impact on the trend of Indians investing overseas.
Reliance Money, part of Reliance Capital Ltd, tied up with UK-based CMC Markets in February and has 1,500 clients who regularly trade in currencies, commodities and stocks listed on international stock exchanges.
Two weeks ago, it also tied up with Chicago-based Alaraon Commodities to offer exchange-traded commodity funds.
Sudip Bandyopadhyay, director and chief executive officer at Reliance Money, said he expects a 50-60% increase in volumes due to the increase in the limit. “Our clients made money during the Tata Corus deal (by investing in Corus shares); some of them are trading in crude oil futures and silver futures; and some have asked for a platform for investing in cotton futures and copper futures” he added.
Bandyopadhyay said his company had encountered three types of investors interested in foreign instruments: high net-worth individuals looking to diversify their portfolio, pure traders, and commodity end-users such as cotton and copper producers who want to hedge against the adverse movement of commodity price.
Kotak’s Natarajan added that the increase in limit would mean a significant increase to the exposure investors can take on derivatives markets. “With the enhanced limit of Rs41 lakh, one can directly take an exposure of up to Rs5 crore as the average margin requirement is 7-8% and the limit can be used in paying the margin amount” he said.
However, some investment advisors are still not sure if there will be a deluge of investors wanting to invest abroad. “The enhanced limit has undoubtedly increased investment avenues. For instance, (a family) can look at private equity funds abroad where the minimum ticket size happens to be $2,50,000-5,00,000. But I don’t see a sudden rush at the same time. The appreciation of the rupee is still a deterrent” said Nipun Mehta, director and co-founder of Unitis Tower Wealth Advisors, a Mumbai-based firm.
Experts also said since mutual funds would also be investing in overseas stocks, investors should invest their $100,000 elsewhere and use the mutual fund route instead for investing in international stocks.
“The mutual fund industry hasn’t yet exhausted the $3 billion limit. Indian investors will increasingly diversify their holdings beyond India. The financially savvy investors who are investing directly in domestic markets may also like to invest in overseas stocks on their own. But those who don’t are likely to come through the mutual fund route” said Rajat Jain, chief investment officer at PNB Principal Asset Management.
The Principal Global Opportunities Fund, the only fund that invests 100% of its assets overseas, has seen its asset base increase from a paltry Rs16 crore in August 2006 to Rs441 crore as on 31 March, 2007.