A Quick Guide to Overseas Investment
Overseas Investment can help in diversifying and hedging against risk when the Indian economy is not doing well. We all get tempted by the term “international” or “global”; the product or the service acquires a whole new status when this word is added to its description.
So, we have international schools, internationally acclaimed services and global citizens. Taking a leaf out of that book technology has thrown open an option wherein an investor can choose to invest outside his or her country without the need to visit that country.
Ashish feels that right now he has a lot of exposure in the Indian stock market and he feels that the Indian growth story is stagnating a bit. His friend advises him to explore markets outside India but Ashish is not so sure so he decides to find out if all this is just hype or does investing outside your country makes sense. Let’s join Ashish on his quest.
Ashish discovers that he has quite a few options to choose from; he could invest in International Mutual Funds offered within India which allow you to invest in a host of countries (some might focus on a particular continent too like Franklin Asia Equity) indirectly and you also can choose from a variety of sectors ranging from gold, energy, real estate, infrastructure (Tata Growing Economies Infrastructure Plan A) etc.
There are a lot of International Mutual Funds available in India: HSBC Emerging Markets, Kotak Global Emerging Markets, Franklin Asia Equity, ING OptiMix Global Commodities, Hang Seng BeEs (mirrors the Hang Seng Index) etc.
Or Ashish can choose to get a little more adventurous and invest in Euro, Dollar or trade in commodities exchange or invest in equity markets across various countries.
In the first option he would not require any overseas account and it will be a safer option as the fund is operative in India; it would definitely be less cumbersome. If he chooses to invest directly in the overseas market he will have to complete the required formalities; understand the procedures well and be more vigilant.
The Dos and the Don’ts of Overseas Investment
- What can you buy? You are allowed to invest in fixed assets, shares, mutuals funds and exchange traded funds without prior approval of the RBI.
- What you cannot buy? You are not allowed to trade in foreign currency bonds issued by Indian companies and buy lotteries; you are also not allowed margin trading and can trade only if there is sufficient money in you trading account. This means that futures, options and short selling a security is ruled out.
- You cannot invest in Nepal, Pakistan, Bhutan, and Mauritius. Periodically the Financial Action Task Force comes out with a of list non cooperative countries; Indians are not allowed to make direct and indirect remittances to these nations.
- Indians are allowed to invest in 24 global indices up to $2 lakhs each financial year.
- The trade is allowed in Indian rupees during Indian market hours to do away with the currency conversion risk.
Conclusions from the Research
Ashish learnt that he could open a trading account for investing in the international market with ICICI Direct, Reliance Money or he could also choose an e-Trading platform in a foreign country (some e-Trading platforms allow you to have an account with them even if you are not a local resident.) he would be required to complete the formalities as prescribed by the organization. Other aspects of his research are summarized below:
- Overseas Investment can help in diversifying and hedging against risk when the Indian economy is not doing so well. In the last two years international funds have managed to outdo the Indian equity due to the depreciating rupee and other domestic economic conditions. Whereas the domestic equity market fell by 9% (in the last year) these funds lost around 1.8%.
- However it is important to know that each year the best performing country varies (amongst the 16 emerging economies) so choosing one will be difficult. Tracking and understanding the economy of another country will be more challenging vis-à-vis understanding the domestic market.
- Ashish realized that in 2011 almost all economies fared badly; Indian equity fell by 30%, Chinese stocks by 20% and the Greek markets took a 60% dip; in such a scenario he could just pray that his losses are minimal but the important factor is that he is not completely insulated.
- Exposure to international markets at any point must not be more than 5-10% of the portfolio.
- Do not concentrate on a particular geographic location, a particular sector or invest in areas known for political turbulence.
- It is a good idea to start with International funds whether Indian or foreign before going all out and investing in equity or currency markets directly.
- Currency fluctuation risk is an additional risk when investing abroad; this can be an advantage and disadvantage as well depending on the economic conditionsAnother factor to consider is the taxation; as taxation laws vary from country to country. Direct investment in real estate is best avoided.
The most important factor to keep in mind is that overseas investment cannot be a quick fix or a panacea to market fluctuations. Like any investing keep a long term view in mind, research well and do not go overboard on a particular option. Overseas investment is just another but not the only option for diversifying your portfolio but it allows you to be part of the global growth story.