According to the International Monetary Fund (IMF), India’s share in the world GDP, according to purchasing power parity (PPP) terms, is 7.98%, which broadly shows that Indian investors have little participation in the overall world’s economic growth. At the same time, Indian investors have nearly 100% of their portfolios in Indian stocks or mutual funds, which means they are missing out on global economic growth.
In a presentation at the recently concluded Morningstar conference, Shankar Sharma, vice-chairman and joint managing director, First Global, an international brokerage firm, argued strongly for global diversification pointing to the 1997 Asian financial crisis as the trigger that alerted him to single country risk. “If you have single-country, single-asset exposure, you are fated to lose sooner or later, irrespective of what the government or fund managers tell you," he said. The 10-year returns of India’s S&P BSE Dollex (the Sensex converted to dollar terms) is 6.8% compared to 13.6% delivered by US’s S&P 500 (also in dollar terms) over the same period. Similarly, Nifty (through Nippon India ETF Nifty BeES, one of the oldest Nifty ETFs) gave 8.39% over the past five years compared to 17.53% delivered (both in rupee terms) by Motilal Oswal Nasdaq 100, which tracks NASDAQ Index (dominated by US tech companies). Even if India outperforms foreign markets, the lack of perfect correlation between different markets itself reduces portfolio risk.
There is clearly a case for diversifying through international stocks and if, like Sriram, you are interested, here’s how to go about it.
How you can invest
Brokerages: A number of large Indian brokerages have tie-ups with foreign brokers to facilitate investment in foreign stocks. You can open an account for foreign stocks through them.
HDFC Securities Ltd is the latest major brokerage to join this bandwagon, announcing a tie-up with Stockal, a New-York headquartered global investment platform on 15 October. “We are adding roughly 1,000 users per week and AUM (assets under management) of roughly ₹1 crore per week," said Sitashwa Srivastava, chief executive officer, Stockal.
ICICI Securities and Axis Securities have a tie-up with Saxobank, a Danish investment bank governed by EU regulations.
Some foreign brokerages have a direct presence in India, including Interactive Brokers LLC, a US-based brokerage. Similarly, a US Securities and Exchange Commission (SEC) registered investment advisor, Vested, offers stocks, exchange-traded funds (ETFs) and custom-made portfolios (called “vests") to Indian investors. It has a tie-up with US SEC-registered broker Drivewealth.
Amount of investment: Indian investors are allowed to invest up to $250,000 per annum in international stocks under the Reserve Bank of India’s (RBI) Liberalised Remittance Scheme (LRS).
Remember to factor in any other foreign remittances you may have made, for instance during foreign travel, while calculating the limit of $250,000 for your investment. You will need to give a declaration that the total amount remitted by you in the financial year is less than this amount and that the money being transferred is from your own sources of income.
You can transfer money to the foreign broker partner through your Indian bank under LRS. For that, visit your bank branch and fill the relevant form (A2 for outward remittance). The broker concerned will guide you through the KYC (know-your-client) procedures.
Under LRS, you cannot invest in derivatives or leveraged products.
The charges: The brokerage rates differ between entities, but typically the range is $1-6 per trade; some brokers charge a percentage rather than an absolute amount.
“We have different brokerage structures. We either charge $5.99 per trade and no subscription fees or a much lower amount per trade and annual subscription fees," said Stockal’s Srivastava.
Vested lists zero commissions for trades, but it does charge a $3 upfront fee and 0.00417% for amounts invested in “vests". Interactive brokers charges 0.005 per share for US stocks and ETFs. It charges a minimum of $1 per trade and a maximum of 1% of the trade value. It does not charge anything for specific ETFs, as per its website.
Holding method: The holding method of US brokerages may be different from the practice in India.
In India, the stocks you invest in are held in your own name in a demat account. In the US, on the other hand, they are held by a third-party custodian in the name of the broker.
Settlement: The settlement cycle in the US is T+2 (trade date plus two business days) for the trade to be completed. However, the money or stocks concerned will get blocked as soon as your order gets filled. Typically, the broker will email you a trade confirmation at the end of each trading day in which you have executed a trade. A US brokerage account is typically protected by the Securities Investor Protection Corp. (SPIC) up to $500,000 (of which $250,000 is for cash). Before you invest, check that the broker is a member of SPIC.
Things to watch for
Foreign exchange: Since the investment in foreign stocks is made by converting your rupees to a foreign currency, you do take on the associated risks and rewards. The value of your portfolio will rise and fall according to rupee’s movement against that foreign currency.
Transferring and withdrawing money will attract currency transfer charges and, hence, a buy-and-hold approach is more efficient than frequent trading. For example, Vested lists out a $35 charge for currency transfer levied by the bank. This may be in addition to any bid-ask spread (difference between the bank’s buy and sell rates).
Taxation: Capital gains made through foreign funds and ETFs are taxed in the same manner as debt mutual funds in India. Gains within a three-year holding period are treated as short-term and are taxed at your slab rate. Gains after a three-year holding period are treated as long-term and are taxed at 20%, with the benefit of indexation. In case of stocks, the qualifying period for long term is two years. Dividends are taxed at your slab rate. But if tax is deducted at source, you can claim benefit under the Double Taxation Avoidance Agreement (DTAAs) between India and the deductor country.
Remember to disclose the value of your foreign assets and income each year in Schedule FA of your income tax return.
Having some part of your portfolio in international stocks is important for diversification. If your portfolio is relatively small, the best route to do that is through a mutual fund registered in India, which invests abroad or a combo mutual fund investing in India and abroad (read more at: bit.ly/2Q5sKsU). Indian mutual funds investing abroad , typically, charge an expense ratio of 0.5-2.5% per annum and you do not need to pay any other commissions or currency conversion fees.
Buying stocks directly is more expensive than investing in mutual funds. Currency conversion and transfer charges will take a 1-2% cut and then you will have to pay brokerage. However, if you have a large investible surplus and are willing to take additional risk, investing in foreign stocks will widen your choices. If you do not want to pick stocks, you can simply pick a US-based ETF like the SPY (S&P 500 ETF).
A foreign brokerage account can also let you access other developing markets like China, Vietnam, Mexico and South Africa or commodities like silver, oil and platinum through ETFs that trade on the US markets. These markets may not be available through India-based mutual funds. Similarly, it can give you access to ETFs tracking debt issued by countries such as the US. The US government’s treasuries are considered among the lowest-risk assets available in the world. With the outlook for India recently downgraded to negative by Moody’s, this is an additional benefit you might want to consider.