How to invest abroad

By Mohasin Athanikar |  13-10-20 | 
 

You love your Starbucks latte, always have your rum with a Coke, your iPhone is a constant companion, and Amazon is where you spend a whole lot of money. Would it not be great if you could even profit from these businesses by being a shareholder?

It is not without reason that international stocks have been garnering a lot of attention amongst retail Indian investors. And rightly so.

Performance is a big pull, especially in the backdrop of subdued domestic equity numbers. International funds have outperformed domestic funds handsomely over the past few years. Over the past decade, the annualized returns of developed markets have overshadowed that of the emerging markets. Indian equities (8.11%) underperformed U.S. equities (19.71%) by a fair margin in INR terms over the past 10 years as of October 09, 2020. The Morningstar Developed Market Index has delivered 15.73% annualised returns, compared to 8.58% by Morningstar Emerging Market Index during this period.

Secondly, in the search for alpha, why should the world not be your hunting ground? What is preventing you from having a stake in leading global firms? Investing outside one’s home market not only diversifies your portfolio but allows you to build wealth by investing in great businesses.

In addition to the underlying asset return, your investments gain if the INR depreciates against the currency in which the underlying assets are denominated. So the hedge against currency risk is also a smart play.

(The list of examples is not exhaustive. Neither are they recommendations. They are mentioned purely for the purpose of illustration.)

Mutual funds by far are the most convenient way to go about it. Make a lumpsum investment or opt for a systematic investment plan, or SIP.

How must you decide?

Plenty of parameters. Geographical exposure (European). Country specific (China, Brazil, U.S.). Global (investments spread across the globe). Thematic (emerging markets, agriculture, mining). Active ETFs. If active, a feeder fund or a domestic fund that invests directly abroad?

Some mutual funds invest directly in U.S. stocks, such as ICICI Prudential US Bluechip Equity. Others like Invesco Pan European Equity and PGIM India Euro Equity are focused on Europe but feed into a global fund.

Parag Parikh Long Term Equity invests in global and domestic stocks.

ABSL International Equity invests directly in stocks across the globe. Ditto with PGIM India Global Equity Opportunities that feeds into a global fund.

ABSL Global Real Estate, DSP World Energy, DSP World Mining, DSP World Gold, DSP World Agriculture are some thematic options.

There are passive options too – Motilal Oswal Nasdaq 100 and Motilal Oswal S&P 500.

Investments in global funds are taxed like fixed-income instruments; 20% post-indexation for long-term gains and at marginal tax rate for short-term gains.

Do check the expense ratio too.

You can also buy shares of foreign companies directly, but for that, you need to route your investment through specific broking houses. Many Indian broking houses have tie-ups with foreign brokers towards this end.

If investing directly, please take note of the brokerage costs, the costs of currency conversion and the cost of opening and maintaining a demat account. Also, ask about the tax implications of investing in the country abroad and India. And if you have to claim a refund under the Double Taxation Avoidance Agreement. Do take into account tax on dividends.

The decision as to how much of an exposure your portfolio should have to global stocks, is a very personal and subjective issue. It could range from 5% to 25%.

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