Equity is the most popular asset class among Indians investing abroad. Over the years, it has become so popular, that the market regulator Securities and Exchange Board of India had to suspend overseas investments by mutual funds (MFs) in January 2022 as the investment limit was breached. However, MFs is not the only avenue to invest abroad, it can be done directly through stock exchanges and fintech apps, too. In the financial year 2021-22, $747 million was sent outside for investment purposes.
Financial planners increasingly recommended international equities to be a part of asset allocation. It gives you a holding in companies and sectors that are otherwise not available in India and allows diversification, both in terms of portfolios and country-wide.
The current fall in the overseas markets presents an opportunity for Indian investors. So what are the avenues and pros and cons of investing overseas?
The mutual fund route
MF investments in overseas listed shares have been doing well. MF schemes focusing on international stocks managed assets worth Rs 38,014 crore as on August 31, 2022. These schemes offer exposure to global equities, region or country-specific stocks and themes. Some of these are actively-managed funds, while others are passively-managed and track country-specific or global indices.
In February 2022, Sebi asked the fund houses to temporarily suspend overseas investments as the investment limit of $7 billion was breached. There is a separate limit of $1 billion for investments in units of exchange-traded funds (ETF), which was, however, not exhausted and schemes feeding into units of ETFs continued business as usual.
In June 2022, the regulator allowed investments under the industry wide limit of US$7 billion as well to only those mutual funds which have sold shares post temporary suspension of overseas investments.
The fund houses can accept subscriptions to the level reached on February 1, 2022. This has allowed some fund houses open their schemes for subscriptions. .
Mutual Funds have emerged as a preferred route to invest overseas because they offer facilities such as systematic investment plans (SIP) in addition to the core benefits such as professionally managed portfolios, transparency and small ticket size. Investments made through these schemes do not fall under investments made through Liberalised Remittance Scheme (LRS) and the same are treated like any other investment made in units of non-equity mutual fund schemes for the purpose of taxation.
Among MFs, ETFs have been one of the popular alternatives for investors. Motilal Oswal Nasdaq 100 ETF is the largest international equity scheme with assets under management of Rs 5,134 crore in the Indian MF industry. The scheme was closed for fresh subscriptions in January 2022 as the overseas investment limit prescribed by the regulator was breached. The units of ETF, however, continued to trade on stock exchanges. The scheme opens for fresh subscriptions on September 19, till it exhausts the headroom specified by the overall limit.
Suvajit Ray, Head of Products, IIFL Securities says, “ETFs tracking broad indices make an efficient investment choice for investing overseas since their costs are low.”
You can buy stocks directly too
While MFs remain a favourite route for many retail investors for overseas exposure, many fintech companies such as Winvesta, Stockcal, Vested Finance have made it easy to directly buy stocks and other securities listed overseas.
Some Indian brokerages have tied up with these fintechs and allowed their clients to invest overseas. In the US, you are allowed to buy even fractional shares which make even high-priced shares accessible to Indian investors. To further sweeten the deal the brokerage charges are very low or zero, depending on which plan you opt for and which platform you trade. You can invest up to $2,50,000 per financial year under LRS.
However, when you remit dollars, there is a cost of remittance. You have to be aware of which stocks to buy. Just because you are familiar with some brands, those shares need not necessarily make a good investment. The cost of compliance needs to be accounted for as you are invested in foreign assets. Also, you cannot invest in products involving leverage or trade futures and options or resort to intra-day trading.
GIFT City: Gateway to global investing
National Stock Exchange of India’s NSE IFSC and BSE-backed India International Exchange (India INX) are two entities that allow investments overseas. India INX has tied up with Interactive Brokers and offers access to 135 exchanges overseas. It is akin to trading through any other fintech app-based facility discussed earlier and allows you to buy securities listed in respective markets overseas. NSE IFSC allows you to trade in unsecured depository receipts (UDR) issued against 50 select stocks listed in the US. The market participants in the US buy the stocks and issue UDR in a predetermined ratio in India. You can buy these and the trades are settled in GIFT city.
How are overseas investments faring?
Though international equities, especially the shares of tech companies did well till CY2021, they are under selling pressure in CY2022. For example, the measure of US stocks, S&P 500 Index is down 17.2 percent compared to a gain of 3.74 percent reported by Nifty50. Technology companies’ stocks have done worse. Though in the recent past, numbers may look bad, the case for geographical diversification still holds.
Vishal Dhawan, founder and chief financial planner, Plan Ahead Wealth Advisors says, “Attractive valuations of US equities compared to what they were a year ago against premium valuations of Indian stocks compared to their long-term average and expectations of strong US dollar make it a strong case for investments in US stocks for investors seeking meaningful diversification.”
The current correction in the US may entice a few savvy investors looking to buy individual stocks. At the same time, there are investors who have invested at the peak of the bull run in US tech names and wondering if there would be a profitable exit in near future.
Swastik Nigam, Founder & CEO, Winvesta says, “We’ve observed that fresh investors are apprehensive about investing in overseas stocks in the current environment. The Indian markets have returned to their peaks. The dollar has strengthened significantly, so you get fewer dollars for your rupees. However, those who have made sizable investments in the US markets have continued pumping fresh capital. They see this as an opportunity, though there are wide-ranging views on recovery. Some expect the markets to fall even more, before jumping back in.” We also observe some investors mitigating losses and repatriating proceeds - hedged by the dollar’s strengthening as well, he adds.
It has been a mixed sentiment among investors looking to go shopping on Wall Street.
How much foreign equities should you own?
Owning Google (Alphabet), Facebook (Meta), Microsoft, IBMs of the world is an interesting idea. It helps you profit from the growth of these global companies.
Experts advise allocating 10 to 30 percent of your corpus to global equities from the diversification point of view. The route you take and the amount of money you invest overseas will vary as per your portfolio size, financial goals and your risk-taking ability in addition to the availability of time and skill to pick the right investment. For most retail investors the mutual fund route may work out to be better given the benefits mentioned earlier. If you are keen to allocate money to equities overseas, do not do it all in one go. Better to invest in a staggered manner.
Dhawan says, “Instead of chasing individual stocks or themes, it is better to stay diversified using an index fund tracking a broad-based index such as S&P 500 or the MSCI World.”Savvy investors keen on some emerging themes may choose some securities and MF units that fit into the themes. Investors, however, should never rely on the short-term past performance of an individual asset class while taking investment decisions.