Invest abroad to beat market risks, but err on the side of caution

Brokerages, online platforms are making foraying into foreign equities easier

If one compares the year-to-date returns of the Nifty 50 and the S&P 500 index, the difference is quite stark (see table). The US index has also beaten the Indian index over the five- and 10-year horizons. While past returns may not get repeated, numbers like these are causing an increasing number of Indian investors to diversify internationally. 

Foraying overseas reduces market-specific risk. “Geographical diversifi-cation adds stability to the portfolio by reducing country-specific risks,” says Rahul Agarwal, director, EZ Wealth. Having exposure to different markets reduces the hit to an investor’s portfolio when his domestic market is underperforming.  Investing abroad also makes more options available. Many sectors and types of businesses—large online retailers, mobile hardware manufacturers, large defence manufacturers, etc.—are not available in India. 

Investing overseas also  takes care of currency risk. Historically, currencies like the US dollar have appreciated against the rupee even over the long term. An Indian investor, who has invested only in domestic assets but has foreign-currency-denominated financial goals (such as foreign education for child) can counter adverse exchange-rate movements by investing abroad.

Investment options available: A wide range is available today. “An Indian investor can invest in foreign stocks, exchange-traded funds (ETFs), mutual funds and bonds. Taking margin, or any other form of leverage, is, however, not allowed,” says Sitashwa Srivastava, founder and CEO, Stockal, which currently allows Indian investors to invest in the US market. Interactive Brokers is another platform many Indian investors use. Many Indian brokerages have tied up with foreign brokers – HDFC Securities with Stockal, ICICI Securities and Axis Securities with Saxobank – to make it easy for their investors to bet on stocks listed on foreign bourses. 

Another option available to Indian investors is the international funds offered by domestic fund houses. “These funds either invest directly or in funds available in those markets. The latter are called fund-of-funds,” says Agarwal. These funds could be country-specific, region-specific, thematic, and so on. Funds exist that invest in the US, Europe, China, Japan, Brazil, and so on. 

Remember the LRS cap: Resident individuals, including minors, can make offshore investments up to $250,000 annually under the Liberalised Remittance Scheme (LRS) for permitted current and capital account transactions, including the purchase of securities. Investments above this require approval from the Reserve Bank of India (RBI).

Indian retail investors wanting to invest directly need to register with a brokerage house. “Someone who wants to invest in the US can open an account with a US brokerage firm, or with an Indian platform that offers the facility. The typical US brokerage firm will require the investor to have a US Social Security Number (SSN). Some firms do open accounts for foreigners, including Indians, without an SSN. However, they have certain stipulations, like minimum account size,” says Srivastava. So, it is better to go via an Indian brokerage house or a platform available in India.  

Allocation to foreign equities should depend on risk appetite. “An exposure of 15-25 per cent in international assets is ideal,” says Agarwal.  Investors should be aware of the risks. “Emerging markets can be even more volatile than the Indian market at times,” says Srivastava.