In order to diversify one's risk arising from one's own economy or may be geography, experts suggest allocation to even overseas mutual funds or stocks. Though the current Covid 19 led risk is the same for all, investors may be better off if one economy overcomes the current crisis before or is able to tap some of the sector at a time so as to reap gains from the movement such as the recent sharp rally seen in the US information technology related stocks.
Now if you are having some funds and want to deploy in the overseas markets, you need to know the various aspects of investing abroad:
1. Modes of making overseas investment:
a. ADR or American Depository Receipts
b. GDR or Global Depository Receipts
d. Overseas focused mutual funds
e. Direct investing in foreign stocks
f. Employee share based plan such as via ESOP, restricted stock unit (RSU) among others
Direct stock investing however involves acquisition of stocks under the liberalised remittance scheme (though this is a bit expensive route) or under the ESBP. These stocks yield income to investors as capital appreciation or by way of dividends.
For ease and when wanting to take exposure in the US or overseas stocks you can also take the mutual fund or ETF route that invests in global equities.
How To Buy Into Foreign Or US Stocks?
Recently Tesla stock saw both a sharp rally and a sharp plunge and in case you have the appetite to take such a risk and want to have that extra pie and want to even tap on to more opportunities, you can invest in these stocks that can be rewarding in the long run.
1. By opening demat with a foreign brokerage firm:
Full service brokers such as Kotak Securities, HDFC Securities etc are enabling clients to open foreign account with their partner or foreign brokers.
Step by Step Procedure to follow:
Domestic brokerages allow opening account with foreign firms. You can choose anyone depending on the cost and other factors.
Submit duly filled separate account opening form and know your customer (KYC) documents.
You need to transfer money to the international partner of the domestic broker through whom the service is provided.
For fund transfer you need to submit application as well as declaration under the LRS route. Form A2 with the broker.
Sign a form for Foreign Exchange Management Act (FEMA) declaration
Form authorizing the designated bank branch as authorized dealer.
Now as you know you can invest in index funds which are known to outpace most of the active funds. Besides, the usual US and European stocks, investors can also look at emerging markets such as China, Brazil, Taiwan, Japan etc. Also, for better allocation across geographies and diversification one can consider investment via SIP or STP route in these overseas funds.
2. By opening account with a domestic firm having overseas tie-up
Interactive Brokers is among few of the foreign brokerages maintaining Indian offices and here Indians can open their account for investment overseas.
3. Apps also facilitate investment abroad:
Say for instance highly recognized Vested Finance is a US Securities nd Exchange Commission (SEC) registered investment advisor that enables overseas investments.
Limitation of investing in foreign stocks
1. Investment limit capped at $250000 by Indian residents:
So the final value shall be decided the basis the current foreign exchange rate. In the current regime dollar to rupee value is hovering at around 73 per US dollar.
2. Profit shall be based on the geographical risk overseas and also shall be depending the currency exchange rate:
In a case your home currency appreciates against the dollar say when you invest in the US market, you will be already incurring loss due to currency rate fluctuation, which needs your high attention.
3. Higher associated cost for transacting in US or other overseas shares:
As the brokerage has to be paid in the US dollar say when investing in the US stocks, it shall be higher and also brokerage houses will ask for a higher annual maintenance charge in comparison to when maintaining domestic demat accounts.