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Is international Investing a fad or is it an idea whose time has come?
I would like to rephrase this question as follows:
Vasudhaiv kutumbakam (The idea that the world is one family)
Vs
Atmarnirbhar Bharat (The idea that India should be self-reliant)
There is no one answer to this. However, I will try and put forward everything that revolves around international investing in an unbiased manner and you can take your call.
Remember Personal Finance is Personal for a reason, because it is different for everyone. However, we shall try to delve into First Principles which can be a guide map on where to start from.
After reading this piece, you shall be in a better place to understand International Investing than where you started with.
Table of contents
1. Introduction
2. It's India's Decade Right, then what is the case of international investing?
3. How is international investment helpful in Diversification?
4. Advantages of International investing
5. Are there any Risks in International Investing?
6. What are the ways to do International Investing?
7. Tax Implications of International Investing
8. Where to invest?
My take on the matter
1. Introduction
International investing is an excellent opportunity for Indian investors to bring diversification to their portfolios and take advantage of trends emerging in the global market.
With the world becoming more interconnected than ever before, investing in international markets has become easier than ever before. However, investing in foreign markets can be challenging, especially for beginners.
Read on to know more.
2. It's India's Decade Right, then what is the case of international investing?
All factors considered, India is bound to grow at a pace which our previous generations have not seen.
We should invest where growth is and that is a no-brainer. Then what is the reason as to why an Indian Investor should even consider International Investing in the first place?
Non-Diversification is a key risk to achieving Financial Freedom, which is the ultimate goal of saving and investment in the first place.
We have discussed at length the reason for diversification in the article "Everything about Asset Allocation you ever wish to know"
3. How is international investment helpful in Diversification?
Diversification does not apply only to the asset class, it applies to geographies as well.
Investing in international markets provides diversification benefits, as it allows you to spread your investments across various countries and industries.
This can help reduce the risk of your portfolio by mitigating the impact of country-specific events or economic downturns.
What happens if tomorrow India's economy goes through turmoil due to political instability, the Indian stock market returns shall dip and so shall your portfolio return.
However say you have invested some portion of your portfolio in US markets as well, they might not be going through the same turmoil. This will provide a cushion to your portfolio return.
However vice versa can also happen, US Markets may go through the recession as well, and your foreign portfolio may take a dip in returns. However Indian markets may not reflect such a downfall and provide a cushion to your return.
The argument is all asset classes perform at different periods of time and they tend to show cyclical performance.
See the table below to understand the same better.
|
Period |
Nifty Returns (India) |
S & P 500 (USA) |
|
Apr 1997
to Dec 2010 |
15.10% |
7.00% |
|
Jan 2011
to May 2023 |
10.50% |
17.90% |
What will perform better now? Its anybody's guess.
This is called the law of averages or reversal to mean. We have written in-depth about the same in our previous blog here.
So now we understand 2 concepts i.e. Benefits of Diversification in another country and that asset classes perform in cycles.
4. Advantages of International investing:
The reason why we are discussing international investment is that all companies which operate in the world are not listed in India.
Therefore it provides Indian investors access to Global Opportunities by taking part in their growth story as well.
a) Technological Superiority - Eg. Apple - There is just one Apple. It leads the smartphone industry in the premium segment across the world.
b) Far Reaching Impact Across Globe - Eg. Google - They are not confined to the growth of one country as such, rather they take part in the world's growth.
c) Advantage of Depreciation of Rupee
Indian National Rupee i.e. INR depreciates about 3-4% on an average against the US Dollar (USD) on a yearly basis.
Assume 1 USD = 80 INR. Now if you invest 8000 INR in USD, You shall get 100 USD as an investment.
Assuming there is no change in your investment value after one year.
Value of USD to INR after one year is as follows: 1 USD = 84 INR
Now if you withdraw the amount, you shall get 8400 INR (100 USD * 84 INR).
This 400 Rs (8400-8000) return that the investor received is just because INR was Depreciated against USD. No equity risk in this element.
Note: Transaction cost has been ignored for simplification.
5. Are there any Risks in International Investing?
Investing in foreign markets can be risky as they are also equities which inherently carry risk and it is essential to understand the risks involved before making any investments.
Risks such as political instability, currency fluctuations, and regulatory changes can impact your investment returns which are very hard for a normal investor to track apart from their domicile country.
So understand the rules of the game before you start playing it.
6. What are the ways to do International Investing?
a) Direct Investing:
An individual can invest up to 2,50,000 USD equivalent every year (Approx INR 2.05 Crore) under Liberalized Remittance scheme of RBI.
Source: RBI FAQ on Liberalized Remittance Scheme - Read Question 1.
Eg. IndMoney is a tool which allows for such investment in US Markets.
This is the riskiest option in International Investing since the investor relies on their own judgement as to which stock shall perform in which country. Caution advised.
b) ETF
ETF Means Exchange Traded Fund. They are passive investments which are pegged to the performance of an Index Eg. Nifty or NASDAQ.
Eg. Motilal Oswal NASDAQ 100 ETF
c) Mutual Fund
i) Few Mutual Funds have an exclusive mandate to invest in International Markets. They invest 100% of their funds in Foreign stocks of a country as per mandate.
Eg. Edelweiss Greater China Equity Off-shore Fund
ii) Another option is that mutual fund schemes can invest a part of their investment in foreign stocks.
Eg. Parag Parikh Flexi Cap fund, DSP Value Fund & SBI Focused Equity Fund
They can invest up to 30% of their portfolio in foreign equities as per their mandate.
In both ETF and Mutual Funds, the investor does not need to have technical know-how and they can leave the job of which country and which stock to invest to the fund manager.
These funds typically provide diversification benefits and can help mitigate the risks associated with investing in individual stocks.
7. Tax Implications of International Investing:
Investing in foreign markets can have tax implications, and therefore it is essential to understand the taxation aspect before making any investments.
a) Direct Investing - They are taxed at 20% plus cess subject to indexation benefit if held for more than 2 years.
b) ETF - They are taxed at the relevant slab rates.
c) In the case of mutual funds, if investment in domestic equities is more than 65%, then they are taxed at 10%. So here as well, Mutual Funds are provided with favourable tax treatment.
8. Where to invest?
Ideally, an Indian investor may look to invest in a foreign country only when the company they are about to invest in are not available in India.
Else it would be "Bagal me chora, Sheher me Dhindhora"
Loosely translating: When something is just beside you, you should be looking around for the same thing.
Further investment should be in matured markets and not emerging markets as they carry even higher risk.
The most important point is that exit from the investment should be just as easy as in the case of Indian Markets. Exit is just as important as entry.
I am listing one of the resources of PPFAS AMC where they speak in depth about how they select which country to invest in and what is their view on China as an investment thesis. You can watch the video here.
Slightly long video, but useful resource if somebody is interested to learn more about the same.
They have zeroed down on just one country where they have invested i.e. USA.
My take on the matter:
I do international investing through mutual funds namely:
Parag Parikh Flexi Cap fund and
SBI Focused Equity Fund
This helps me with diversification and differentiation advantages. They invest in USA tech giants like Google. Meta, Amazon and Microsoft.
The taxation applicable is of domestic equity @10% since they invest more than 65% in Indian equities while also giving a diversification advantage by investing up to 30% in international stocks.
In my personal opinion, most investors are fine investing in the US alone just because of the size of the US economy and also because the type of companies which operates in US markets are not available in any part of the world.
Further, I don't have to do any research myself as to which companies in US markets are attractively valued. I have left that job to the fund manager.
Approx 4% of my portfolio is invested in US Stocks through Indian Mutual Funds.
Closing Remarks - Even a novice may find it useful to invest his first SIP in such a fund which invests a part of their portfolio in foreign markets. This doesn't have to be an investment for Matured Investor only.
What is your take on the matter? Do let me know your feedback through WhatsApp here.
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The writer is a passionate student of finance and markets.
CA Parth Shah
You can read all my previous blogs here:
Thanks for reading!
Until next time, keep learning.
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