For investments abroad, opt for direct stocks

Investments in stocks abroad will be part of India’s LRS of $250,000 per financial year.
Investments in stocks abroad will be part of India’s LRS of $250,000 per financial year.

Summary

  • There are multiple ways of investing abroad. One of the convenient avenues of doing so is mutual funds.

Investment in global equity is one of the avenues for diversifying your portfolio. While India is the growth story of this century and thus should have a greater allocation in your portfolio, there are certain arguments in favour of global investments as well. One is that it helps you to diversify your exposure to other economies and markets. The other reason is that it helps you benefit from the depreciation of the rupee. When you invest, the exchange rate is at a certain level. And when you redeem the investments, if the rupee has depreciated against, say, the US dollar, you get a higher converted value.

There are multiple ways of investing abroad. One of the convenient avenues of doing so is mutual funds (MFs). There are fund of funds (FoFs) that invest in one or more funds, thus making the underlying fund(s) available to the investor of the FoF. There are Exchange Traded Funds (ETFs) that are listed at stock exchanges in India—the National Stock Exchange and BSE, which invest in stocks abroad.

There are also index funds available in India that invest in stocks abroad. Index funds are so called since the funds follow the designated index and the fund manager does not take any active decision in fund management. However, now that there are overall limits, i.e.$7 billion for investment in overseas securities and another $1 billion for ETFs, there is a lid on MFs. The limit of $7 billion for funds was hit on 1 February 2022 and has not been raised by the Reserve Bank of India, the banking regulator, since then. FoFs that invest in ETFs listed on foreign exchanges will have to stop accepting fresh investments from 1 April 2024.

However, you can invest in global stocks directly. NSE International Exchange (NSE IFSC) and BSE International Exchange (INX) have trading facilities on their IFSC platforms in GIFT City, Ahmedabad. Global (US) stocks, i.e. select leading stocks, are listed at NSE IFSC at Gujarat International Finance Tec-City (GIFT).

Investors can invest or trade in a fraction of a stock— this is possible as it is in the form of depository receipts (DR) of the stocks. Investors can hold the DRs in their demat account opened in GIFT City. The price of the stocks in Indian rupeee would be on the higher side, due to the currency conversion rate. The way it works is that you can buy, not the stock directly, but an IFSC receipt, which is a negotiable financial instrument in the nature of a DR. The US stock is the underlying asset, and the receipt represents a fractional ownership of one stock.

Let us take an illustration. Let us say, you have a positive view on Apple, the US technology giant, and want to take exposure to its stock. The price of the stock is say, 171. But this is 171 US dollars. At a conversion rate of, say, 83, the price per share of Apple would be approximately 14,000. The price of one DR with Apple as underlying at NSE IFSC is, say, $6.8. At a conversion rate of 83, it is approximately 564. Hence you are buying approximately 4% of a single stock of Apple, with commensurate benefits in price appreciation, dividends, etc.

Investments in stocks abroad will be part of India’s Liberalized Remittance Scheme (LRS) of $250,000 per financial year. At an exchange of 83 to the dollar, it is a limit of 2.07 crore per financial year.

Apart from NSE IFSC, there are global brokerage platforms with presence in India where you can open an account, get your money converted from rupee to dollar or any other relevant currency, deposit the dollars in your account, and invest in global stocks—US or other markets.

So far so good. In any investment vehicle, for e.g. MF or Portfolio Management Services (PMS) or Alternative Investment Funds (AIF), there is a professional fund management team. If you are a do-it -ourself (DIY) investor, you may not have the bandwidth to analyse stocks and manage your portfolio. Hence, you may need to go through a wealth manager with global capabilities, one who can guide you and with whom you can have an interaction on the global stock selection rationale.

Taxation of global stocks is akin to that of unlisted shares, as these are not listed on any stock exchange in India. Over a holding period of two years, it is eligible for long term capital gains (LTCG) taxation. The taxation rate for LTCG is 20% with the benefit of indexation.

Joydeep Sen is a corporate trainer (financial markets) and author.

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