Investing beyond domestic borders can be an excellent way to diversify your portfolio, hedge risks, and access global opportunities. Overseas investments allow exposure to some of the world’s leading businesses, economies, and market segments, which are unavailable in India.
Let’s explore how Indian retail investors can invest globally under the framework governed by Indian exchange control rules, updated by the Government of India and the Reserve Bank of India on August 22, 2022.
How to Invest Globally
1. Foreign Mutual Funds
International mutual funds can be a convenient alternative if you’re not keen on directly investing in foreign stocks. These funds invest in equities from international markets, offering exposure to global indexes like the NASDAQ.
Investing in foreign mutual funds falls under the Liberalized Remittance Scheme (LRS) limit but doesn’t require additional reporting under the new framework.
2. Investing in Foreign Shares
Indian residents can invest in listed shares of international companies, provided their holding is less than 10%, with no controlling interest.
To start, open an overseas trading account through:
Indian brokers partnered with international brokerage firms.
Directly with foreign brokers that operate in India.
While direct investments offer a hands-on approach to owning global stocks, it’s essential to research thoroughly and consider cross-border fees.
3. Exchange-Traded Funds (ETFs)
ETFs are investment funds traded on stock exchanges that can track global indexes. They are accessible through local or international brokers and offer a cost-effective way to replicate the movement of international markets.
Advantages of ETFs:
Lower expense ratios compared to mutual funds.
Diversified exposure across sectors and markets.
However, ensure the ETF is registered with regulatory authorities to avoid scams.
4. Foreign Index Funds
Index funds mirror specific stock market indexes. For example, funds tracking global benchmarks allow investors to participate in international markets.
Benefits:
Access to global indexes for diversification.
Cost-effective for long-term investors.
Index funds are particularly useful for individuals who prefer a passive investment strategy.
5. Direct Equity in Foreign Companies
Directly investing in shares of international corporations provides complete ownership. However, it demands significant research and a deep understanding of market dynamics.
Things to consider:
Cross-border brokerage fees.
Economic and currency factors affecting share performance.
Direct investments often involve higher risks but may yield substantial returns if chosen wisely.
6. Real Estate Investments
You may also invest in property overseas, depending on the target country's regulations. While real estate can diversify your portfolio, it requires more capital and is less liquid than other investment options.
7. Debt Instruments
Investing in bonds issued by foreign governments or corporations provides a steady income stream. These instruments are an excellent choice for those seeking lower-risk options with international exposure.
Debt instruments fall under the LRS limit, with no additional reporting requirements under the updated framework.
Factors to Consider Before Investing Outside India
Investment Limits
Under the LRS, Indian residents can remit up to ₹2.5 lakh per financial year for direct equity, real estate, or debt investments abroad.
There is no limit on investing in funds of funds (FoFs) since the funds are managed domestically.
Research Requirements
Investing internationally demands detailed research into the country’s market trends, economic policies, and the performance of specific funds or companies.
Economic Factors
Consider the target country's macroeconomic and microeconomic elements, such as central bank policies, GDP growth, and market stability.
Tax Implications
Direct equity investments are considered long-term capital gains (LTCG) if held for more than two years and taxed at 20% with indexation benefits.
Dividends are taxed according to the investor's tax slab.
Conclusion
Global investments offer diversification and the chance to participate in leading markets. While mutual funds and ETFs provide an accessible route, direct equity or property investments may require more capital and effort.
Regardless of the avenue, thorough research and understanding of international markets are critical. Investing abroad can hedge against domestic risks and provide exposure to diverse opportunities, helping you build a robust, balanced portfolio.
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