Delhi-based housewife Archana Gupta wants to send her 14-year-old daughter abroad for higher studies. There is, however, one big challenge before her. The 45-year-old is worried about the depreciating rupee, which means she will have to shell out more than just the college fees to cover the currency risk. Consider this: On December 20, 2011, $1 was equal to Rs 52.77, while on December 20, 2021, it was equal to Rs 75.84. It is for this reason that she and her businessman husband are considering investing in equities in international markets as, along with higher returns, it also hedges against currency fluctuations.
There are many like Gupta who are investing in international markets to build a fund that eliminates the currency risk. Direct investing is possible in the stocks of several countries, but investing in US stocks is considered the most popular as the New York Stock Exchange (NYSE) and NASDAQ are the world’s largest stock exchanges. “One can invest in some of the world’s largest technology companies like Apple, Tesla, Starbucks, Nike and Meta (Facebook) when investing in the US stock markets. Such investment opportunities are not available via local stock markets,” says Viram Shah, Co-founder and CEO of Vested Finance, a California-headquartered company, which is a registered investment advisor with the US Securities and Exchange Commission (SEC).
However, people have now started looking beyond the US markets and their investments are also not limited to equities. “We are seeing investors access unique opportunities in the UK and Europe—using Winvesta’s multi-currency account—and diversifying beyond US stocks. These include managed funds, crowdfunding platforms, fractional real estate, and debt instruments,” says Prateek Jain, Co-founder and President, Winvesta, a financial services firm headquartered and regulated in the UK.
Another key benefit of investing overseas is that it gives a geographic diversification to your portfolio and ensures that you don’t have all your eggs in one basket. “You can invest in companies and themes that are touted to be the future and are not easily available in the domestic market, such as clean energy, cryptocurrencies, robotics, and AI, among others,” says Jain.
The first question, of course, is how does one invest in the overseas market? There are several ways to do that. You can open a brokerage account abroad either through a domestic brokerage (such as Vested Finance or Winvesta) that offers this service or through a foreign brokerage. Many Indian brokers also enable foreign investing for their customers. Angel Broking, 5paisa and Axis Direct, for instance, have partnered with Vested Finance to provide services to their clients.
Once your account is open, you need to fund it with foreign currency. Investments in the account are made by using the Liberalised Remittance Scheme (LRS) of the Reserve Bank of India (RBI), which is available to all resident Indians. Through this scheme, an individual can remit up to $250,000 per financial year for such transactions.
“Investments in US equities must be made in US dollars. For this, you need to remit USD to the partner bank in the US. To open an account, you will need proofs of ID and address. The whole process is paperless and can be completed in minutes. The next step after KYC is to fund your account with USD,” explains Shah.
To make the process of investing in the US markets easy, Vested has also launched Vested Direct in partnership with SBM Bank India. Vested Direct is an INR wallet that lets you load USD into your US brokerage account. You can use your existing bank’s netbanking solution to load funds into your Vested Direct account, after which you can initiate a USD deposit request from the app. “When you are initiating a deposit request for the first time, SBM Bank will require your existing bank account statement of 12 months. Once SBM Bank approves your transaction, the funds will get credited to your Vested brokerage account within 24 hours,” says Shah.
Once the funds are in, you can start investing. You can place trades and, most importantly, buy fractional shares. This means that you can get started by investing as little as $1. “With Winvesta’s new UPI-based remittances, investing in US stocks can become as easy as investing domestically,” says Jain.
Testing the Waters
Let’s look at the returns. The Nifty 50 has underperformed the S&P 500 this year. According to data provided by Winvesta, Nifty, the 50-stock Indian benchmark, has gained 20 per cent, while the S&P 500 has returned 25 per cent to investors this year (till December 21). If we talk about a 10-year timeframe, Nifty gained 255 per cent, while S&P 500 rose 273 per cent over the same period. On top of that, the US dollar appreciated almost 43 per cent against the INR over 10 years, making the returns of S&P 500 over 430 per cent in INR terms.
However, the picture remains incomplete if we don’t take costs into consideration. Unlike the domestic market, where your money gets fully invested straightaway, in case of international investing, various charges get deducted before the amount gets invested. Suppose you want to invest Rs 1 lakh in the US markets, then around Rs 3,000-5,000 can be deducted towards various costs such as remittance and forex charges. However, these charges vary from broker to broker. For example, Vested charges remittance expenses from Rs 1,000-1,500 per transaction. These charges are nil through Vested Direct. Similarly, Winvesta has a remittance fee of Rs 500-1,500 if you opt for UPI through banks. Otherwise, the charges are nil. But that’s not all. You are also charged around $10-11 at the time of withdrawing money from your account. Then there are forex inward charges of 0.5-1 per cent.
A back-of-the-envelope calculation shows that for small investors, investing directly could be a costly affair. This is because an investment of Rs 10,000 can cost approximately Rs 1,000-2,500. Small investors, therefore, need to earn high returns to cover the cost of investing abroad. Having said that, the remittance and withdrawal charges remain the same, even if one invests a higher amount. So, when investing abroad, a higher investment will cost you a lot lower.
We are aware of certain benefits that taxpayers can avail from investment in India-listed equities. For example, long-term capital gain of up to Rs 1 lakh is exempt from taxation. Long-term capital gain exceeding Rs 1 lakh is taxed at a special rate of 10 per cent only. Short-term capital gain is taxed at a special rate of 15 per cent. However, these benefits are not available for investment in foreign equities.
“Investment in foreign equities would be considered as any other asset such as gold, etc. So the gain would be long-term if the holding period is 36 months or more, and the tax rate would be 20 per cent. Short-term gains would be taxed as per regular slab rates. One more important aspect to note is that we need to report this holding as foreign asset in income tax returns. So if you are a salaried person, you need to file ITR-2,” says Sujit Bangar, Founder, Taxbuddy.com, a portal for tax return filing and a tax advisory business.
But what happens if one inherits foreign shares? The US levies an inheritance tax, or estate tax, at the time of inheritance. However, such tax is leviable only if the transferor is a citizen, resident or a green card holder of the US. “If a resident Indian individual inherits US equities held by his/her parents who were also Indian citizens, there won’t be any inheritance tax,” says Bangar.
You don’t need to have an overseas broking account to invest in international stocks, as there are many international mutual funds that are available in India. The biggest advantage of these international funds is that you can invest in rupees without getting into the hassle of remittances and forex charges.
Top performers such as Motilal Oswal NASDAQ 100 ETF, Edelweiss US Value Equity Offshore and Motilal Oswal S&P 500 Index Fund have given returns of 28.52 per cent, 26.79 per cent and 27.76 per cent, respectively, over the past one year. In comparison, individual stocks such as Google, Apple and Tesla have given returns of 69 per cent, 33.58 per cent and 61 per cent, respectively, over the last one year.
So, which route is better—investing directly or through mutual funds? “We see that direct international investors churn their portfolio a lot chasing trends and, thus, invite capital gains taxes. A passive international fund would be cheaper and hassle-free for a vast majority of investors. However, if your portfolio value is large and you have the time to devote to analyse and track foreign stocks, then by all means invest directly,” says Gaurav Rastogi, Founder and Chief Executive Officer, Kuvera.in, a wealth management platform.
Lovaii Navlakhi, Managing Director and CEO of financial planning firm International Money Matters, says: “We would recommend that one starts with funds that invest in global developed markets. The entry can be made in a staggered manner and approximately 10-15 per cent of domestic equity investment can be allocated to international funds. Once you get familiar and are comfortable with these investments, take small bites of countrywide or sectoral allocations, and increase your exposure and understanding.”
While many might get tempted to invest in international stocks, it is advisable to take the plunge after understanding the costs involved. It best suits people with big portfolios. For small investors, international mutual funds could be the best option.