Direct investors in foreign equities should make a cautious start

When investing directly, go with exchange traded funds and curated portfolios initially and graduate to individual stocks once you have found your footing

Indian investors have always had a massive home bias in their investment portfolios. Their assumption has been that since India’s GDP growth rate is much higher than that of the developed markets, their portfolios would grow much faster if they invested their money in the Indian stock market. However, things have not quite worked out so. Experts say a portfolio built from stocks of various leading foreign giants has the potential to outperform portfolios built purely out of Indian stocks, because the former would contain global leaders who benefit from growth not just on their home turf but globally.

Going global, via the direct route  

Many Indian equity investors today are not satisfied with investing in the foreign funds offered by Indian mutual fund houses. "The number of schemes available in India that allow you to take exposure to global equities is limited. The universe of stocks and exchange traded funds (ETFs) that becomes available to you is much larger if you invest directly in a foreign stock market," says Vikas Nanda, co-founder, Globalise, which recently launched its platform for guided global investing for Indians.

The international funds offered by Indian fund houses are predominantly equity-based products. If you want to invest in other asset classes, such as emerging market debt, US treasury bonds, or real estate investment trusts, those options are not available.

When you invest via the mutual fund route, your final returns come back to you in rupees. You will then have to take the trouble and expense to transfer it abroad again, if you have a foreign currency denominated goal. It is simpler to have your portfolio in the same currency that you will spend in. This becomes possible when you take the direct route.

Attractive universe of stocks

Attractive opportunities open up to an investor who chooses to invest directly in an overseas market. "You get access to the most innovative companies in the world, like Tesla, Nio (the Chinese car maker), etc that have done very well in the recent past. Moreover, companies that are at the forefront in their respective fields are continuously joining the US market. Companies like Airbnb, Snowflake (in cloud computing), and so on carried out their initial public offerings in the past one year. For people who are comfortable doing the research and taking exposure to individual stocks, the opportunities in the US market are immense," says Nanda.

By investing directly, investors can control the weight a particular stock has in their portfolio. "Today, an investor may want a higher exposure to Tesla than he would get if he invests through an S&P 500 index fund. He can get that by investing directly," says Viram Shah, chief executive officer and co-founder, Vested Finance. He adds that many investors work in industries wherein they gain an intimate knowledge of companies listed abroad. They wish to capitalise on that knowledge by investing directly in them.

Longer-term investors can reap cost advantages, too, as many of the ETFs available abroad are very low cost.

Be mindful of costs   

The fee charged by these platforms is not very high. Globalise, for instance, has two pricing plans. The first one has no annual fee. The investor pays a fee of 2.5 cents (around Rs 1.50) per share. The second plan requires the customer to pay an annual fee of Rs 5,000, after which he does not have to pay any charge while trading. Under both the plans, the customer gets access to features like readymade portfolios.

At Vested, the investor pays an initial joining fee of Rs 399. To buy a pre-built portfolio, he has to pay a fee of $3. There is also an annual maintenance fee of 0.5 per cent on these pre-built portfolios. Vested also has a premium subscription, which costs Rs 2,500 a year. The $3 fee is waived for premium service subscribers.

Investors will also have to pay a few additional costs. One, there is the fee that has to be paid to your bank for remitting foreign exchange abroad, usually in the range of Rs 1,000-1,500 per transaction. You will also have to pay a small mark-up for purchasing foreign exchange (around 1.5 per cent).

Make a small start

These platforms allow you to make a small start. A single stock of Tesla costs about $845 currently. However, most platforms in India allow fractional ownership. Some, like Globalise, do not have any minimum balance requirement.

However, given the additional costs involved (in purchase of foreign exchange and its transfer), the cost will work out to be high if the amount you invest is small. Experts say it would be advisable to begin with a sum of at least $1,000.

Meet your regulatory obligations

Under the Liberalised Remittance Scheme (LRS), an individual can transfer up to $250,000 per year. Indian residents are also not allowed to borrow and invest overseas, which rules out all kinds of leveraged trading. Hence, platforms that cater to Indian investors do not allow margin trading or derivative investments.

Avail of advice

Since Indian investors are likely to find it difficult to research foreign stocks on their own, some of these platforms offer readymade portfolios. "These portfolios are for people who don't have the time or the ability to research and find the right stocks themselves. We do the research and offer curated stocks and exchange traded funds," says Nanda. While many of these portfolios are goal oriented (say, for someone in his mid-30s who wants to save for his child's education), some are based on specific themes (like artificial intelligence, ESG, biotech, etc) which the investor may be interested in. The research team evaluates these portfolios constantly and suggests rebalancing to adjust the weights, and also to change the funds whenever required. Globalise also offers facilities so that Indian investors can continue to work with their existing advisers, while investing abroad.

Vested, a platform that has been around for one and a half years now, also offers pre-built portfolios. It also offers investors a feature called Collection. "Investors can look up the universe of stocks in the theme they are interested in, say, electric vehicles, artificial intelligence, etc. We also offer collections based on geography, like Europe, East Asia, and so on," says Shah.

To select the right platform, get the opinions of a few existing users or browse online for feedback. Select a platform that offers a seamless experience. Check that the platform you are going with is a regulated entity. Vested, for instance, is regulated by the US regulator Securities and Exchange Commission.

Begin cautiously

Those who are new to foreign equities should begin with exchange traded funds and pre-built portfolios, so that they are exposed to a diversified basket. Only after they have become comfortable and knowledgeable about investing in foreign equities should they venture into direct stocks.

While buying individual stocks, or thematic ETFs, investors must be conscious of the associated risks. "Technology stocks and ETFs are very popular now. But what if the sector is adversely affected by anti-trust regulations, or privacy-related regulations?" says Vishal Dhawan, chief financial planner, Plan Ahead Wealth Advisers. He adds that investors should not invest blindly in popular names, but should factor in their valuations. He also suggests investing for the long term, instead of trading. When you invest for the longer term, your costs get amortised over a longer period. Those who can should take the help of financial advisers to contain their risks better.

Why diversify into foreign equities

• Investing abroad gives Indian investors the benefit of geographical diversification
• The Indian market has a low correlation with developed markets like the US. Exposure to both Indian and US equities will make the portfolio less volatile
• The Indian rupee tends to depreciate by 3-4 per cent annually against the US dollar over the long term. By investing in a dollar-denominated asset class, investors can hedge this risk
• The Indian market accounts for only 3 per cent of global market cap
• By confining themselves only to the Indian market, investors will miss out on the opportunities available in the balance 97 per cent
• Many affluent Indians have dollar-denominated goals, such as children's higher education at a foreign university, foreign travel, etc.
• For such investors, it makes a lot of sense to also save and invest in a foreign currency denominated portfolio
• If you have a goal such as buying real estate abroad, which involves a massive expenditure, the Liberalised Remittance Scheme (LRS) limit of $250,000 per year could become an impediment
• So, it works out better if your portfolio is abroad and you can transfer money directly from it to buy a house