Investing internationally can be a good diversification tool but look at the risks too
Currency volatility and higher taxation for international funds are two aspects one should be aware of
The Indian economy is on a downward trend. The International Monetary Fund (IMF) recently lowered India’s economic growth forecast for financial year 2019-2020 to 4.8% from 6.1% earlier. Similarly, Moody’s Investors Service slashed its FY20 growth projection for India from 6.6% earlier to 5.4%. The slowing economic growth is already hurting corporates and that in turn is likely to hit your investment portfolio as well. In this scenario, does it make sense for you to look beyond at global avenues of investments?
Financial planners say international investment avenues can be considered as a tool for diversifying your portfolio. “Diversification is a key ingredient for achieving investment success on a sustainable basis. While usually investors diversify their portfolios by investing across different asset classes like equity, debt and gold, investing in international markets is another way to do so," said Hemant Rustagi, chief executive officer, Wiseinvest Advisors, a financial planning firm.
Economic and geographical factors such as the growth rate, inflation rate, currency value, interest rates and the availability of natural resources vary across countries and so do the returns and risk from investments. “Global investing adds a new dimension to diversification as international markets are un-correlated in a number of ways and one gets an opportunity to invest in economies that either have a current account surplus or a low fiscal deficit," added Rustagi.
Diversifying the portfolio internationally may also act as a hedge against negative domestic events. We tell you the investment avenues available, and the risks and factors you should consider before investing abroad.
You can invest in mutual funds, exchange-traded funds, direct equity and even immovable property abroad.
Mutual funds: One way to invest in global markets is through international funds and fund of funds (FoFs). “International funds can be an efficient vehicle to invest globally. These are mostly FoFs that invest in existing global funds. These global funds, in turn, invest in companies within a country or region, as per its stated investment objective and strategy," said Rustagi. However, not all mutual funds that invest in global equities are FoFs, some mutual funds directly hold international stocks such as ICICI US Bluechip and Parag Parikh Long Term Equity Fund.
Investing in an FoF or an international fund is easier and cost-effective than investing in any other avenue that provides global exposure to investors. Some of the international funds have also performed better than many domestic funds. “Many diversified US equity funds have given more than 15% compounded returns over the last three years. Therefore, you are getting twin benefits of diversification and potentially good returns by allocating to international funds," said Varun Girilal, co-founder and executive director, Mitraz Investment Advisors, a financial planning firm.
But consider the risks. “While we have all got used to the rupee getting weaker against the US dollar, we should not forget that there was a period from 2006 to 2008 when the rupee gained against the US dollar. Currency volatility and higher taxation for international funds (short-term taxed at slab rate and long-term at 20% with indexation) are two aspects one should be aware of," said Girilal.
Also, it may not be everyone’s cup of tea. “It would be prudent to highlight here that international funds are more suitable for experienced investors who have already built a decent sized domestic equity portfolio," added Rustagi.
Direct equity: You can also buy shares of foreign companies directly, but for that you need to route your investment through foreign exchanges and broking houses of the respective country. Many Indian broking houses have tie-ups with foreign brokers to facilitate investment in foreign stocks. However, as compared to investing in FoFs or international funds, investing in shares of foreign companies directly may result in higher transaction cost because of the charges you will have to pay for the demat account, brokerage and currency conversion.
Real estate: Real estate is a popular asset class that many may be tempted to invest into as it may offer additional benefits such as access to citizenship and other social benefits.
“Investment in property abroad makes sense for NRIs who are employed or have business interests in the country of choice. Indians who have settled or are planning to settle abroad permanently are, of course, prime candidates, as are HNI resident Indians looking to diversify their real estate portfolios," said Anuj Puri, chairman, ANAROCK Property Consultants Pvt. Ltd, a real estate consultancy firm. “Also, many foreign property markets are far more transparent than our own, so investors can get ‘clean’ deals much faster and easier. Finally, residential status in a foreign country has great aspirational value," added Puri.
But the asset class suffers the same problems abroad that it suffers in India. According to financial planners, there can be challenges to investing in real estate abroad since it’s an illiquid asset. Also, maintaining a property situated in another country and adhering to local laws and tax rules can pose problems. It can only work if you have a family member living there who can take care of the property or have a business interest and plan to settle in the country of investment in the future.
There are two aspects to consider here—how much of your total portfolio can be invested in international market and how much you are allowed to invest as per the Indian government’s policy.
“Experienced and larger investors may consider allocating more than 20% of their portfolios and also look at more sector and country-based themes," said Girilal.
There is no limit when it comes to investments in FoFs, as you are not required to remit any amount outside the country for investment. You can invest in FoFs through asset management companies operating in India.
However, if you buy a property abroad or invest in direct equities, remember that resident Indians are only allowed to remit an aggregate sum of $250,000 per financial year under the Liberalised Remittance Scheme of the Reserve Bank of India.
The tax factor
Keep in mind the income tax implication on the returns and investments you make in the global market. For instance, in case of shares of foreign companies, the holding period should be two years for gains to be qualified as long-term capital gains (LTCG), which is taxed at 20% with indexation. In comparison, for LTCG in India, the tax rate is 10%. Also, dividends up to ₹10 lakh received from owning shares of Indian companies are exempt from tax in the hands of shareholders till FY20, but this exemption is not available for dividends received from a foreign company; from the next financial year, though, dividends from domestic as well as foreign companies will get the same tax treatment.
Further, according to Indian tax laws, residents or ordinarily residents of India have to declare all foreign bank accounts and immovable assets in foreign countries in their income tax return, irrespective of whether they are earning any income from such investment or not. Tax has to be paid on any income, including capital gains and rental income.
Though income earned from foreign investments are taxable in the hands of the individual, if taxes are paid in the country of origin, the investor may claim relief under the Double Taxation Avoidance Agreement, if any.
To understand all the risks, the details of the tax implications on international investments and other factors, consult an expert before investing.