Investing in Foreign Stocks from India

It’s possible to invest in Foreign Stocks from India. This could be done by investing money in International Mutual Funds or Direct investing in Foreign stocks from India

In this article, we will cover both these options in detail. Also, read about my caveat regarding trading on insider information in foreign stocks from India.

Foreign Stocks India

International Mutual Funds

These are funds that invest outside the country. For instance, a mutual fund may offer a scheme to investors in India, with an investment objective to invest abroad. 

Many times Indian MF companies tie up with a foreign fund (called the host fund) for this purpose. If an Indian mutual fund sees potential in China, it will tie up with a Chinese fund. In India, it will launch what is called a feeder fund. Investors in India will invest in the feeder fund. The money collected in the feeder fund would be invested in the Chinese host fund. Thus, when the Chinese market does well, the Chinese host fund would do well, and the feeder fund in India will also give good returns.

Such feeder funds can be used for any kind of international investment, subject to the scheme objective. The investment could be specific to a country (like the China fund) or diversified across many countries (Think Europe Fund). A feeder fund can be aligned to any host fund with any investment objective in any part of the world, subject to legal restrictions of India and the other country.

In such schemes, you would invest in rupees for buying the Units. The rupees are converted into foreign currency for investing abroad. They need to be re-converted into rupees when the money is to be paid back to the local investors. Since the future exchange rates cannot be predicted today, there is an element of foreign currency risk.

Your total return in such schemes will depend on how the international investment performs, as well as how the foreign currency performs. Weakness in the foreign currency can pull down the investors’ overall return. At the same time, appreciation in the foreign currency will boost the portfolio performance.

There are many benefits of these International Funds:
  • Diversification among Geographies other than India. Geographical diversification is partly for pursuing growth (in a potentially high-growth market, for example) and partly for mitigating the risk of focusing on domestic markets alone.
  • Invest in certain market sectors that are only available in the form of international themes. Certain market sector themes are available only in international funds (Gold mining companies and real estate-themed funds are a couple of examples).
  • Currency Depreciation – Take benefit from a potential rupee depreciation against a particular currency. The exchange rate is an opportunistic consideration that could yield double benefit in a situation where the Indian economy is weak and the rupee is sliding—investment growth would be magnified in rupee terms when the currency weakens.
But, there are two issues to keep in mind — 1) How to identify where to invest and 2) What percentage of a portfolio should such funds occupy?
 
Unless you are an active investor, who has the skill and capacity to identify the geography, sectors and the correct exchange scenarios, you should stick to broadly diversified funds from relatively large markets such as the US and China. Franklin Templeton, ICICI Prudential and Mirae Asset are some of the fund houses that have good international feeder funds to invest in these markets.
 
That brings us to what percentage of the portfolio such funds merit. Considering the fact that India continues to present one of the best growth opportunities in the world, it would be foolish to allocate more than 10-15% of your portfolio for such funds.
 
Also know that from the taxation perspective, returns from these funds will not be treated on par with equity funds (although these funds may be equity funds, albeit international). Such funds will be treated on par with debt funds for taxation, which means long-term gains will be taxed at 10% without indexation and at 20% with indexation.

Direct investing in Foreign Stocks from India

If you are not interested in International mutual funds but want to directly invest in a high growth company like GoPro, Google, Apple or Microsoft, you can do that as well.

First Open a trading account with a brokerage house (like Kotak Securities) that offer the international trading facility. These domestic brokers have partnered with international investment firms to allow this. These firms act as an intermediary and execute the trades on your behalf in the foreign markets. To my knowledge, only a few Indian broking companies like Kotak Securities, ICICI Direct, India Infoline, Reliance Money & Religare offer these services to Indian investors.

You will need to submit a duly filled account opening form along with KYC documents. Note that this will be separate from your Indian brokerage account.

You then need to transfer money (see limits below) to the international investment partner of the domestic equity broker.

Funds are transferred to the international investment partner as below:

  1. Submit application-cum-declaration form under LRS (read below about LRS).
  2. Fill up Form A2 – Application for withdrawal of Foreign Exchange (this will be available with your brokerage house as well as with your Bank). Please make sure that you put the correct purpose code in this form.
  3. Give declaration under FEMA – Foreign Exchange Management Act (this will also be available with your brokerage house as well as with your Bank).
  4. A form authorizing the designated bank branch as the authorized dealer.

Once the funds are transferred, you can start buying and selling foreign stocks on the online platform.

The process of trading in foreign equity markets is not complicated, but you need to understand the dynamics of global investing. You can understand the revenue sources for Bharti Airtel in India but it is very difficult to do so for Verizon ot AT&T in USA.

Form A2

Foreign Stocks India

Transfer limits for an Indian Investor to Buy Foreign Stocks?

The Reserve Bank of India (RBI) allows an individual to remit$250,000 US Dollars per financial year (April-March) under the Liberalized Remittance Scheme (LRS), which can be used for investing abroad.

Liberalized Remittance Scheme – Under LRS, domestic investors are allowed to remit a certain amount of money during a financial year to another country. This money can be used to buy foreign stocks and debt instruments in the overseas market. Apart from this, the remitted amount can also be used to pay expenses related to travelling, medical treatment or studying. Please make sure that you put the correct purpose code in form A2.

A caveat regarding trading on insider information.

 

Nowadays many foreign companies have their development center or offshore center and many individuals working in these companies come across information which could be deemed as “Insider information”. If you planning to open a brokerage account to invest directly in such stocks, then please bear in mind that it is illegal to do such a thing. You would not only lose your job but also get in trouble with law enforcement agencies of foreign countries and could be disbarred for life for travelling to that country.

Posted in Financial Planning and tagged Foreign Stocks, Foreign Stocks India, mutual funds.