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To overcome the home country bias in investing— tendency to invest significantly in domestic equities —one needs to invest in foreign equities as well for better diversification. To get exposure to the foreign markets, the simple option is to go through a mutual fund route.

If you are a well-informed investor, you can also invest in specific stocks/ETFs directly. Of course, special platform in the Gujarat’s Gift City is also being set-up to enable transaction of international securities.

At present, investments by mutual funds in overseas stocks are suspended on account of the mutual fund industry hitting the Securities and Exchange Board of India (Sebi) limit of $7 billion. However, this limit is expected to be raised soon.

In this story, we focus on the options available for an investor through direct stock picking route and how it compares with the mutual fund route.

Options available

Some Indian brokers/platforms have tied up with foreign brokers to facilitate direct investment in foreign markets for their users.

For example, ICICI Securities associated with Interactive Brokers LLC, a registered broker dealer, regulated by the US Securities and Exchange Commission (SEC).

 

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Fintech platforms in India such as Vested, Stockal and Groww too provide facilities for foreign investing.

Investors can also open an account directly with the foreign broker that are providing services in India. In all the cases, the account will be held and maintained by the foreign broker.

Make sure the foreign broker is a member of Securities Investor Protection Corporation (SIPC). In such case, your account will be insured as securities in your brokerage account.

Such securities held in the account of a SIPC member are protected up to $500,000 in the event of the foreign broker going bankrupt.

The number of countries to which access is given depends on broker/platform you choose.

For example, ICICI Securities allow investments in geographies such as the US, UK, Germany, Japan, Singapore and Hong Kong.

While Groww provides access mostly to the US stocks.

When amount is transferred from your Indian bank account to foreign bank account, transfer charges will be applicable.

If you are investing through an Indian broker, brokerage/commission charges will also be levied.

These charges vary with the subscription plan that an investor buy with the broker.

For example, ICICI Securities has three plans — Classic at zero cost, Global Select at 999 per annum and Global Advantage at 9,999 per annum. The brokerage charges for these plans for transactions with US stand at $2.75 per trade, $1.99 per trade and free of cost, respectively.

Most of these platforms allow you to do fractional investing as well, that allow you to buy fractional value of a stock irrespective of its price.

For example, you can buy a 0.1 share of stock ‘X’ for $300 (assuming cost of 1 share is $3,000).

This allows an opportunity to participate and invest in shares that are expensive and not affordable.

Further, many of these platforms also provide ready-made portfolios, which would be backed/developed by investment advisors.

These are pre-configured baskets of stocks and exchange-traded funds (ETFs) that you can invest instantly.

HDFC Securities call it ‘stacks’, which are contributed by DriveWealth foreign broker.

Say, EV Stack on the platform is a electric vehicles portfolio with long-term investments in companies developing electric vehicles, autonomous vehicles, batteries and other EV.

Each pre-built portfolio has a fee which is computed as a percentage of the investment value and may also depend on the basic/premium subscription plan opted with the broker.

The AUM fee varies with each provider and roughly in the range of 1-3 per cent.

MFs Vs direct route

Comparing mutual funds to direct stock investing abroad may not be an apple to apple comparison.

Direct investing through a broker comes under RBI’s LRS (Liberalised Remittance Scheme) that relates to foreign currency (typically USD) remittances that Indian residents make.

Under LRS, a resident is allowed to invest only up to $250,000 every year.

Mutual funds are not covered under these rules. “Investments in mutual funds with overseas investments, are still domestic investments from the Indian resident investor’s perspective," said Rishabh Shroff, Partner and Co-Head-Private Client, Cyril Amarchand Mangaldas.

Secondly, the cost in case of investing through a mutual fund is compressed into one ratio, which is total expense ratio.

On the other hand, direct investing includes bank transfer fee on transferring and remitting (about 1-2%) and brokerage charges (up to $2) on each transaction.

In the latter case, banks may also deduct tax collected at source (TCS) at 5% when remittances total to 7 lakh or more in a financial year.

Of course, this can be later used by the investor to set-off his/her total tax liability for assessment year.

In terms of taxation, while investments through mutual funds are considered as debt funds, investments through direct investing is regarded as unlisted shares for taxation purpose.

Also, in the latter case, details of the financial assets purchased have to be disclosed separately in the Income Tax Return (ITR).

One pertinent point to note in case of direct investing is that, in case of an unfortunate demise of the Indian investor, investments in foreign securities may attract inheritance tax while remitted back sale proceeds to India.

Referring to investments in the US, Kunal Savani, Partner, Cyril Amarchand Mangaldas said, “Typically, individuals who are not US citizens are subjected to estates taxes on their US based assets, which includes stocks issued by US corporations. The applicable threshold limit for calculation of inheritance tax is $ 60,000 subject to conditions."

He added, “Contrary to above, investments through Indian MFs, most probably, would not be exposed to such estate taxes as investments will be held by Indian Mutual funds and not by individuals."

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