There are several investment avenues like foreign stocks, mutual funds and real estate for those who are looking to invest abroad
The Indian economy is still reeling under the effects of the coronavirus. This is the reason why the economy has slowed down. Looking at the economy, the International Monetary Fund (IMF) has lowered Indiaâ€™s economic growth forecast for financial year 2020-2021 to a negative 4.5%. However, it has said that the economy will recover in 2021. The slowing economic growth has led to lower earnings for corporates and that in turn could hit an investorâ€™s portfolio. This might be the reason why many High Networth Individuals (HNIs) are looking at overseas investments.
One can use global investment avenues as a way for diversifying the investorâ€™s portfolio. How? When you invest abroad, you can protect your portfolio from domestic events that affect the Indian stock markets. This will act as a hedge for your portfolio. With plenty of investment opportunities globally, one can invest in countries that have low fiscal deficit or a current account surplus.
If you want to invest globally, you can use mutual funds, Exchange-Traded Funds (ETFs), direct equity and real estate abroad.
You can purchase stocks of foreign companies directly. However, for that you will need to make the investment using foreign stock exchanges. You will need the help of a broking house in the country where you are purchasing shares. Now there are several Indian broking companies or banks that have tie-ups with foreign brokers. But direct investing in foreign stocks is for investors who have a fair knowledge of global stocks and other global macroeconomic trends. You need to be aware of when to get in and when to get out as well. If you are not willing to do that, then you can look at mutual funds which take exposure in global stocks.
There are many international mutual funds, fund of funds (FoFs) that investors can consider for global investments. Note that while there are some mutual funds that directly hold international stocks such as ICICI US Bluechip, most international funds are FoFs that invest in existing international funds. These international funds will invest in companies within a country.
Investing in FoFs is easier and most cost-effective when compared to investing in any other global investing avenues. Some of the global funds have actually performed much better than Indian mutual funds. If you look at the returns for the past 3 years, diversified US equity funds have provided more than 14%.
The only risk here is that of currency movements of the rupee and the dollar. While most of the time the rupee keeps getting weaker against the foreign currency such as the US dollar, there might be periods where the rupee might gain against the foreign currencies. This needs to be noted when you invest globally.
Another point to note is that there is higher taxation for international funds if you are holding them for the short term. Short term capital gains (STCG) from sale of global investments will be taxed as per your tax bracket. However, long term capital gains (LTCG) will be taxed at 20% and you get the indexation benefit. So, global mutual funds are more suited to experienced investors who have already built a good domestic equity portfolio.
Investing in foreign real estate provides benefits such as access to global citizenship and other social benefits. This asset is best for those Non-Resident Indians (NRIs) who are working abroad or conducting business globally. Even those HNIs who are looking to settle abroad permanently could look at investing in real estate. Since property markets abroad are transparent, it is easier to make legitimate deals.
The risk here is that real estate is an illiquid asset. It may not be easy to sell the property, and maintenance of the property might be a problem. You need to adhere to local laws and tax rules. So, it is better to make real estate investments only when you have a family member in that country to take care of the property.
How much can you invest?
If you are investing in real estate and direct equities, you can remit only up to $2,50,000 in a financial year under the Liberalised Remittance Scheme of the Reserve Bank of India (RBI). This is if you are a resident Indian. However, there are no limits for investing in FoFs. You can invest in these funds through the asset management companies (AMC) in India.
The most important point is that you shouldnâ€™t allocate more than 20% of your portfolio to global investing unless you are planning to settle abroad on a permanent basis.
How will global investments be taxed?
If you purchase shares of foreign companies and sell them after two years, then the gains will be Long Term Capital Gains. This will be taxed at 20% with indexation benefit. Note that LTCG from Indian listed shares is taxed at 10% after a year’s holding. Dividends that you receive from shares in foreign companies will be taxable. In case foreign shares are held for upto 24 months only, then the resultant gains are treated as short term capital gains which are added to total income and taxed at applicable slab rates.
Points to note
If you are a resident or ordinarily resident of India, you will need to declare all global bank accounts and immovable assets in foreign countries when you file your income tax return (ITR). This is irrespective of whether you are earning any income from such investments or not. However, if taxes are paid in the country of origin, you get relief under the Double Taxation Avoidance Agreement.
Looking to invest abroad? Wealthzi.com offers a host of global investing services to guide you. Click here to learn more about these.