Investing in foreign stocks allows Indian investors to invest in some of the world’s most valuable and renowned companies, from technology companies such as Microsoft, Apple, Google, Tesla, Amazon, Alibaba and Netflix to conventional companies. such as Samsung, SaudiAramco, Visa, LVMH and Tencent Holdings.
It is permissible to invest in foreign stocks from India and a reasonable allocation can be made to these stocks to diversify your portfolio. Under the Reserve Bank of India (RBI) Liberalized Remission Program (LRS), Resident Indians are allowed to pay up to $ 250,000 per fiscal year for portfolio investments and other permitted transactions.
In addition, the availability of complete information and the high standards of governance of these companies and exchanges provide a better understanding of the investments you make.
If you are looking to invest in globally listed stocks, here is how you can go about it.
Investment via the liberalized transfer system (LRS) limit
Investments outside of India are governed by India’s foreign exchange regulations and rules. Portfolio investment in foreign stocks or bonds abroad is permitted for resident Indians under the RBI’s LRS, in which resident Indians are permitted to contribute up to $ 250,000 per fiscal year for any authorized transaction on the current account or in capital or a combination of the two. The investment in the Gift City International Financial Services Center (IFSC) would also be covered by the LRS.
In addition, the LRS only applies to an Indian resident. It does not apply to a Non-Resident Indian (NRI) and therefore NRIs are not bound by the investment limit of $ 250,000 per fiscal year only. They can invest unlimited on their overseas assets and can also send $ 1 million per fiscal year from India.
An investor can use some or all of the following methods to invest in foreign stocks:
An investor can invest directly in foreign equities either by opening an overseas trading account with an Indian broker (such as Axis Securities, HDFC Securities, ICICI Direct, among others) which is in partnership with a foreign broker; or by directly contacting a foreign broker (such as TD Ameritrade, Charles Schwab International Account, Interactive Brokers, etc.) and open an overseas trading account with them.
However, some foreign brokers may require investors to maintain a minimum deposit which may be in addition to their capital requirements.
Investment in foreign equities listed on GIFT City IFSC:
NSE International Exchange (also known as NSE IFSC), a wholly owned subsidiary of NSE Ltd. and The India International Exchange (IFSC) Limited (also known as India INX), a branch of ESB, are the two main international exchanges, based in the IFSC at Gujarat International Finance Tec-City (GIFT City). These exchanges provide an international trading platform for Indian investors to invest in international equities.
Mutual fund :
An investor can also channel his investments to the foreign market through mutual funds. He can choose between an international fund or an Indian fund that invests in foreign stocks. Index funds that invest in foreign indices such as S&P 500, NASDAQ 100, Dow Jones, Russell, etc. can also be used as an indirect tool to invest in foreign stocks.
Investors who lack understanding and knowledge of the stock markets but want to diversify their portfolio can assess and opt for this mode of investing in foreign stocks.
New generation applications:
Many fintech startups have launched mobile apps, which simplify the investment process and help Indian investors invest in stocks listed in foreign stocks.
Factors to consider before investing in foreign stocks
Before investing in a foreign stock, an investor should be wary of and should assess the following in general apart from in-depth analysis of the issuing company:
When investing in a foreign country, it is necessary to understand and analyze the risks associated with the place / country of investment. Considerations such as geopolitical risks, macroeconomic and issuing entity specific factors, future business prospects, etc., industry should be taken into account. For example, investing in the stock market in a country that has the potential for war or conflict with India should be avoided.
Currency fluctuation risk
Likewise, the currency risk linked to currency fluctuations cannot be ignored. Currency fluctuation refers to the volatility of the foreign exchange currency (for example, US dollar or British pound) relative to Indian currency, which may result in profit or loss for the investor and hence , the target returns must take into account any risk of currency fluctuations.
For example, if the US dollar is expected to strengthen against the Indian rupee, you will get a higher return in terms of the rupee and vice versa.
Risk of volatility
Fluctuations in stock prices, in both directions, can be viewed as volatility risk. Simply put, volatility is the risk associated with the magnitude of changes in the value of a stock. The higher the volatility, the riskier the stock, as its price becomes unpredictable. In general, stronger, less volatile developed markets are better from an investment perspective.
An adverse change in the macroeconomic factors of an economy is called economic risk. Unemployment, fluctuations in interest rates, political instability, unwanted changes in laws, etc. are a few factors that can seriously affect the operations of an organization in this economy, thus affecting the price of their shares. Therefore, before investing in foreign stocks, an investor should assess all macroeconomic factors of the investment country.
Costs of investing in foreign stocks
It is relevant to note that the transaction cost for the purpose of investing in foreign stocks would generally be higher than that of Indian stocks. A hidden transaction cost is the difference between the rate of buying and selling the foreign currency (say the US dollar).
It is advisable to also open a bank account in the same currency you are investing in to avoid frequent currency conversions.
The other important components are:
- Margin requirements
- bank charges
- Deposit fees
- Applicable Goods and Services Tax / VAT / STT, if applicable.
- On average and assuming a reasonable portfolio, the transaction cost can be, as an indication, of the order of 0.5% to 2%.
Taking into account the collection of withholding tax (TCS)
In accordance with Section 206C (1G) of the Income Tax Act 1961 (“Information Technology Act”), withholding tax (TCS) at the rate of 5% would be levied and collected by the authorized concessionaire’s bank in the case of an Indian investor making an investment in foreign equities under the LRS provided that the disbursement exceeds the prescribed threshold limit of 7 lakh INR in a fiscal year particular financial.
Such TCS would be on payment exceeding INR 7 lakh. The TCS rate can be further increased by up to 10%, in the event of unavailability of a PAN card or an Aadhar card. However, the amount of TCS collected can be claimed by the investor as a tax credit when filing their tax return in India. Accordingly, it is not a transaction tax but a tax for which a credit can be claimed against other income in India or can be claimed as a refund, as the case may be.
While investing in foreign stocks is a good opportunity to diversify the investment portfolio, it should only be done by following informed decision-making processes. Last but not the least, investors should assess their investment horizon, risk-return preferences, financial goals and level of risk tolerance before investing in international stocks. Investors must ensure compliance with foreign exchange control regulations, reporting of foreign assets and income, and compliance in the country of investment.