The fine print in foreign investing

You can remit abroad or in India. Both entail their own risks

Foreign investment opportunities are opening for Indians and there is more choice available today, in different forms. This includes investing in foreign stocks, mutual funds and even exposure to foreign indices. The choice is likely to get wider in the coming months.

Options
An investor can directly make an investment abroad. The Reserve Bank of India permits remittances outside India up to $200,000 a year. This would mean the funds are transferred to a foreign account (trading, investment or bank) and then the investment is made or the funds are directly invested in the instrument chosen. Here, rupees would be converted into foreign currency. The second route that has opened up in the past couple of years where one can invest in India but get exposure abroad. There is a large difference in the manner these two operate.

Foreign exchange
There are two occasions when the foreign exchange element would come into play. The first is when the money is initially converted into the foreign currency and then when it is reconverted back to rupees. If the investor converted Rs 50 lakh into dollars when the rate was Rs 50, then this would give $100,000. If the rate then went to Rs 45 for a dollar, the same amount in dollar terms reconverted would result in a reduction of capital. What increases the danger in conversion transactions is that the timing can go horribly wrong.

When an investment is through a mutual fund, the risk element is lower. But the individual does not have to deal with it.

Cost
The cost involved in any investment is a vital factor, as this eats away at the investor's returns. When there is an investment made directly there is a cost of opening a trading account, maintaining a balance there, plus the brokerage and other costs.This can make the entire process a bit expensive to complete. Investing through a mutual fund scheme reduces cost as it is fixed.

Time
The time involved in the investments will also be different when conducted differently. There will be more time spent on investments made directly abroad because it will require scouting out the investment and then making a choice from the options available. When there is an investment made here, the time factor is reduced and known to the investor. This makes the process easy to plan and gives some amount of certainty. For example, if the route is a mutual fund and the amount put in before 3 pm on a working day, the investor knows the price will be net asset value of the day.

Real time linking
In an investment made directly abroad, real-time prices will be available when the foreign markets are operating. On the other hand, when it comes to local investment, there could be a difference in the price alignment if the Indian market and the foreign market timings do not match. As a result, the value in the Indian market today would actually be the closed price of say, yesterday’s markets abroad.

The writer is a certified financial planner