If you glance around your house, you will notice you have surrounded yourself with products and services offered by some of the top tech giants from the United States of America. You frequently visit your Facebook page, order multiple products on Amazon all probably via your iPhone (Apple).
Even for entertainment, you switch on your FireStick (Amazon) surfing through content provided by Netflix, Prime (Amazon) and other online platforms.
Now, as an investor, your antenna is always up, constantly on the lookout for new opportunities to invest. And so, anytime you come across a great product or service, you immediately think of it as a prospective investment.
But since these services and products belonged to foreign companies, you were probably de-motivated to invest. Firstly, you were not sure you could have invested internationally or even wanted the additional hassle of investing in another country. But this is no longer the case.
A recent survey revealed that some 70% of Indian investors showed interest in investing in foreign stocks. I am betting these are the new-age investors who use these products and services. And therefore understand the potential of these companies. More so, they probably realise how investing in another country can help them diversify their investment risks.
But unfortunately, most of them are still clueless, not knowing where to begin. And so, with that in mind, I am highlighting some aspects of investing in foreign stocks. I am sure it will answer any questions you have.
How can I invest in foreign stocks?
Indian investors looking to invest in foreign stocks essentially have two options:
via Brokerage firms - domestic or foreign.
You can opt for some of the foreign brokerage firms with a direct presence in India or use your existing domestic brokerage firms itself (offering a global investing platform).
As in the past year, some of the top Indian brokerage firms have tied up with foreign brokerage firms, to help invest internationally. So far ICICI Direct, Axis Securities and HDFC securities have already launched their international platforms while Zerodha and Motilal Oswal still in the process of launching.
via Indian Mutual funds - Investing in foreign stocks only or a combination of domestic and foreign.
Your other option is to invest via Indian Mutual funds. Several Indian mutual funds invest in foreign stocks. And you can divide them into four simple categories:
a. mutual funds that actively invest the entire AUM in foreign stocks like the ICICI Prudential US Bluechip Equity Fund or the DSP World Mining Fund.
b. mutual funds that actively invest in both foreign and domestic stocks like the Parag Parikh Mutual Fund which invests 30-35% of its AUM in foreign stock
c. mutual funds that passively invest in an index, much like the Indian index mutual funds and
d. mutual funds referred to as seeder mutual funds that invest all proceeds into another US-based Mutual fund that is not present in India. For example, the Edelweiss US Technology Equity Fund of Fund invests all the money it receives into the JP Morgan US Technology Fund.
Is there a minimum ticket size?
No. There is no minimum ticket size for buying foreign stocks.
How much can you invest in foreign stocks?
While there is no minimum ticket size to invest in foreign stocks, there is an upper limit.
International investing involves remittances of funds. And this falls under the Reserve Bank of India's scheme referred to as the Liberalised Remittance Scheme (LRS).
Under this scheme, Indian residents are allowed to remit up to $250,000 to any country in a given financial year.
Now, keep in mind that this amount is not just for investments. It applies to all remittances made by an individual in a financial year and includes education, travel, medical treatment and investments (except derivates and leveraged products).
So if you want to use the entire amount for investments, ensure that you have not exhausted your limit. As at the end of the financial year, you need to submit a declaration stating that your total amount of remittances are well within the annual limit.
Do I need to open a new bank account?
No, you need not open a new bank account for investing internationally. The existing one can transfer the money to your foreign brokerage account. The brokerage firm can take care of all the necessary paperwork like KYC etc.
What are the transaction costs?
Every brokerage firm has a different cost structure. They can charge you:
an annual subscription fee plus charges for every transaction or
a fixed transaction fee, either in absolute terms ranging from $0.8-$6 per transaction or in a percentage form.
So while comparing brokerage firms ensure that you factor in all costs (annual fees and transaction charges).
Investors often ignore transaction costs. They forget that even a small per cent can add up to a lot over time, quickly eating into your returns. So, you must choose a platform that not only optimises your returns but also minimises your trading costs.
How are capital gains on foreign stocks taxed?
Capital gains from investments in foreign stocks and capital gains from investment in funds are taxed differently. So, the qualifying period for the long-term investment in stocks is two years, not three years as in the case of funds.
Capital gains within three-years are considered short-term, taxed at your prevalent slab rate and
Capital gains after three-years are considered long-term, taxed at 20%.
Dividend from international investments will be taxed at your prevailing slab rate. But in the event of a tax deduction at source, you can claim the benefit under the Double Taxation Avoidance Agreement.
Do I need to invest in international stocks?
With every other top brokerage firm announcing its foray into international investing doesn't make it the new mantra to generate that extra bit of alpha in your portfolio. Neither does it guarantee any stable returns. What it does is reduce the risk in your portfolio by diversifying your investments. So for some local reasons, if your money lying in one part of the world did not do well, you still have some in the other part doing just fine.
If you have a relatively small portfolio, opt for investing via Indian mutual funds investing internationally. They are far more economical and easy to manage than buying foreign stocks directly.
When you buy directly, currency conversion, brokerage and transfer charges easily take away 2-4% of your investment value. Whereas, mutual funds will charge anywhere between 0.25-2% (expense ration).
But, if you have a large portfolio, investing directly in stocks makes more sense. It widens your options and gives you access to markets other than the US, which mutual funds don't offer at the moment.