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Business News/ Opinion / Online-views/  Buying overseas stocks can be risky
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Buying overseas stocks can be risky

Buying overseas stocks can be risky

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Though we all know about the concept of geographical diversification for our portfolios, but to realize its merit, we need to look at numbers. And the numbers back the concept. The BSE Sensex declined 9.37% last year, while the S&P 500 Index in the US rose 7.82% for the same period; not to speak of individual stocks such as Apple Inc. and Mastercard Inc. that grew at a phenomenal rate of 72.66% and 76.23%, respectively, in the same period.

If you are a first-time equity investor, do not start with investing in foreign equity, but if you are an investor with a well-diversified portfolio in India, this is a good trigger point to include foreign equity as a sliver of their asset allocation.

The good news is that there are domestic brokerages that facilitate this. However, remember that while returns can look juicy, there are risks to contend with as with any other equity investment.

How do you invest?

Just as you place orders in your demat account, you can log on to your overseas account and choose an exchange and stock that you want to pick. To facilitate trading, you must choose a base currency for settling trades.

Also, there is a limit on total trade value as specified by the government. “Under liberalized remittance scheme of the Reserve Bank of India, resident individuals are allowed to remit up to $200,000 per financial year (April to March) for any current or capital account transaction or combination of both," says Vishal Gulechha, head (product equity), ICICI Securities Ltd.

The risks

International diversification comes with unique risks. The challenge starts with choosing the market and stocks to invest in. Typically, the foreign broker has an adviser and gives you online access to live data and news feed. But matching stocks with your risk appetite can be tricky. “A high networth individual may have the knowledge and capacity to pick stocks abroad, but he may lack the qualification," says Gaurang Shah, assistant vice-president, Geojit BNP Paribas Financial Services Ltd.

Other than business fundamentals, you have to analyse external factors—the economic environment, socioeconomic set-up and other political issues are essential to your choice. “Just by going online and searching for the fundamentals may not be enough. We have seen in the past that too-big-to-fail companies have collapsed and corporate governance remains a critical issue," adds Shah.

Also, there is currency risk. If the Indian rupee appreciates against the foreign currency your stock is denominated in, your returns can be negative.

Lastly, it may be difficult to track the different time zones overseas markets operate in.

What should you do?

However, spotting the right opportunities needs time and study of the market abroad and may not always be possible. “When the Citibank stock collapsed in 2008, it was worth picking a stock as downside was limited. However such opportunities rarely arise," says Shah.

Also, remember there are domestic funds that invest in stocks abroad or in overseas funds. “If someone has a long-term view and can hold their investments, it is good for them. Also you can take the exchange-traded fund route for investing in themes such as mining or oil exploration, which are not available here," says B. Gopkumar, executive vice-president and head (broking), Kotak Securities Ltd.

In any stock market, domestic or overseas, stay away from direct stock picking if you do not have the expertise to analyse and follow markets. Tracking overseas stock may be even tougher. For those who can indulge, keep in mind the risks before you take the plunge. Also remember the Indian equity market has good opportunities so invest in overseas stocks only if the risk-reward is far superior.

Graphics by Yogesh Kumar/Mint

saurabh.k@livemint.com

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Published: 08 Apr 2012, 08:50 PM IST
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