VMPL
New Delhi [India], August 22: The importance of diversification at the core is to reduce your risk of capital losses. When you choose to invest beyond the borders of your domestic market, the motivations are the same. However, in the case of retail investors, several other factors drive investment interests apart from just risk mitigation.
Retail investors also choose to invest globally for the possibility of higher returns. It gives them the ability to invest in some of the biggest companies worldwide, which is a big part of value investing. Most of the largest companies in the world, like Amazon, Google, Facebook (Meta), and Apple, have a profound impact on our daily lives. Retail investors have an increased interest in investing in them as a part of value-oriented investing. While these reasons are all valid, investors need to keep other things in mind when it comes to diversifying their portfolio internationally.
Diversifying your investments internationally helps protect your investments against currency depreciation. The value of the Indian Rupee changes against other global currencies like the US dollar or the European Euro. Diversifying your investments globally keeps at least a part of your portfolio protected against currency depreciations. It also exposes your portfolio to a new market and offers various growth opportunities.
Now that you know about the importance of diversification and its benefits, let’s learn how to invest in foreign and international stocks and some of their key risks.
How To Invest in ADRs Listed on US Exchanges
ADRs, or American Depository Receipts, are financial instruments aimed at helping American investors invest in foreign companies without the hassle of currency exchange. Several international companies (foreign to the US) are listed on US exchanges, like Alibaba Group from China, Nestle from Switzerland, Toyota from Japan, and even Infosys from India. Indian investors can purchase these stocks as ADRs through US exchanges.
As a full-service brokerage platform regulated by the Securities and Exchange Board of India (SEBI), Sharekhan allows investors to invest directly in ADRs without hassle. However, there are additional formalities and verifications investors will have to go through before they are eligible for international investments through their Sharekhan Demat Accounts.
The detailed process of investing in ADRs and international stocks with your DEMAT account and nine other ways are discussed in the next section.
10 Ways Explained To Invest in Foreign And International Stocks
* Domestic Brokers: This is the easiest and most straightforward way for Indian retail investors to invest directly in international stocks. You only need a DEMAT account with a domestic broker in India that has ties with international brokers. In this way, you can invest in international stocks directly from your DEMAT account. However, in this case, you must fulfil certain additional formalities to make your DEMAT account eligible for international stock trading as an overseas trading account. One of the best and easiest ways for you to invest directly in international stocks through domestic brokers is to use Sharekhan.
* International Brokers: Another option for direct foreign investment for retail investors in India is to open a DEMAT account with foreign brokerages available in India. International brokerages allow Indian citizens to open DEMAT accounts with them. With an international DEMAT account, you can easily buy and sell international stocks directly. However, it should be noted that these accounts have hefty charges for investors as currency conversion charges are applied. The companies mentioned above do not require investors to be foreign nationals (have US or other foreign citizenship).
Please note when you are directly investing in international stocks through domestic or international brokers, you should consider the LRS limits. The Reserve Bank of India (RBI) introduced the Liberalised Remittance Scheme (LRS) to make foreign exchange hassle-free for Indian investors. According to the scheme, Indian citizens are allowed to invest up to $250,000 abroad without the need for any special permissions. This includes stock investments and even real estate purchases. Considering an INR to USD currency exchange rate of Rs83, the total amount allowed to be invested abroad by the LRS scheme in a financial year amounts to over Rs2 crore. The limit includes all foreign expenses an individual can perform in a financial year. So, make sure you don’t go over the exemption limit, as it can attract fines and penalties.
* Indian Depository Receipts (IDRs): Foreign companies can raise capital from Indian investors without listing their stocks on Indian domestic exchanges with IDRs. The issuing companies can issue any number of IDRs. It allows retail investors to invest in these foreign companies from their domestic exchanges in Indian Rupees without any currency exchange. However, companies need to issue IDRs for retail investors to be able to invest in them. This means IDRs are not always available, and they may not be available from the companies that you want to invest in.
* International Exchange-Traded Funds (ETFs): Exchange-traded funds (ETFs) are an indirect international investment opportunity for Indian investors. As domestic mutual fund houses create these funds, investors do not need any special account or permission to invest in them. In fact, the transactions are performed in Indian currency since investors purchase fund units and not individual stocks directly. One of the best benefits of investing in international ETFs is allowing investors to trade their holdings and manage their portfolios more efficiently than mutual fund schemes.
* International Mutual Fund Schemes: International mutual fund schemes are retail investors’ best indirect international investment option. They are best for long-term investment opportunities and have lower risks than direct stock investments, as the funds are expertly managed. Several index funds in India track foreign indices like the S&P 500 (Standard and Poor’s 500) or NASDAQ 100. Investing in these funds is easy for Indian investors and requires no special permissions or forex charges.
* International Fund of Funds: International Fund of Funds (FoFs) allow investors to invest in multiple international mutual fund schemes with a single investment. These investments are great for diversifying your portfolio. There are several international FoFs in India based on different themes, regions, and continents. Retail investors can easily invest in these funds like any mutual fund scheme.
* Investment in Global Depository Receipts (GDR): GDRs allow companies to raise money from foreign investors without listing their stocks in the country’s domestic stock market. For example, Tata Motors issued 7 million GDRs on the Luxembourg Stock Exchange in 2018. This allowed them to raise $124.5 million without listing their stock in the local stock exchanges. Select brokerages in India, like Sharekhan, allow investors to purchase GDRs directly from their platform. However, investors need to have the required permissions and formalities completed before being able to make these investments. Also, please note that the example listed above is for understanding purposes. As Tata Motors is an Indian company, an Indian investor doesn’t need to invest in it as a GDR. You can invest in the GDRs of foreign companies that are available on international stock exchanges.
* Investment in American Depository Receipts (ADR): ADRs are financial instruments that allow American citizens to purchase stocks in foreign companies without going through the complexities of foreign markets and currencies. ADRs are issued by Amercian depository banks, which hold the foreign company’s shares in custody. Indian investors can also buy these ADRs using online investment platforms like Sharekhan. ADRs allow Indian investors to invest in foreign companies that are not listed on Indian stock exchanges but are listed on US exchanges.
* Using Portfolio Management Services: If you are a high net-worth individual (HNI), you can choose to use portfolio management services in India. This allows you to get your own investment portfolio manager, who will be in charge of managing and diversifying your investments. You can use their services to invest in international stocks directly or indirectly as per their expert advice.
* International Investment Platforms: There are several new-age apps and startups that allow Indian investors to invest directly in US stocks and ETFs. These platforms are designed to help investors invest internationally, so they are an easy way for retail investors to get started with international investments.
Key Risks of Investing in Foreign And International Stocks
There are several risks when you are learning how to invest in foreign stocks from India. Investors must be aware of these risks before they choose to invest internationally.
Currency Risks: When you are investing in international stocks, most of the investments will go through in a foreign currency like the US dollar. So, when you are considering investing, there are additional factors you’ll need to consider, like the currency exchange rates. For example, stocks in the Indian stock exchanges are listed in INR, allowing investors to buy stocks in larger numbers. With the same amount of investment, you’ll get to purchase fewer stocks in US exchanges as the individual stock prices are higher. Similarly, when you are selling your holdings, you have to time not only the market but also the currency exchange rates to ensure you get to withdraw your desired returns.
Regulations: Just like Indian investors have to be aware of the Union Budget and other government policies that affect industries, as an international investor, you’ll need to be equally aware of the internal affairs of foreign countries. If you’re investing in US exchanges, you’ll need to be aware of US legislation and federal changes that affect the industries or companies where you’re invested. Without a thorough understanding of government regulations and market dynamics, your investments will be at a significant risk.
Taxability: Just like regulations, the tax laws for any industry are subject to change in foreign countries, just like they can change in India. Investors will always have to stay updated about this to ensure that their investments are safe. Apart from that, international investments are taxed in India just like domestic stock market investments, so any returns you earn will attract short or long-term capital gains taxes and dividend taxes.
Interest Rate Risks: This is one of the most important risks you should be aware of if you want to invest in US stocks. The US economy is debt-heavy. If the companies you are investing in are taking on more debt to meet their operational needs, it will impact the returns of that stock. So, make sure you perform due diligence about the companies you are investing in before you invest.
Country-Related Risks: Even though the US is a politically stable country, announcements by the federal government in the US can also cause stock market volatility there, just like it happens after the Union Budget in India. As an Indian national, it is difficult for you to be updated about every aspect of political, social, and economic factors that can impact the US stock markets. So, it is crucial that you consider these country-related risks before investing.
Conclusion
These are some of the most common ways to invest in foreign and international stocks from India. If you are interested in getting started, make sure you sign up for a forex currency trading account with Sharekhan to start your international investments. Our professional tools and international investment options can help you diversify your portfolio and get the international exposure you desire. Sharekhan is the easiest answer to the question of how to invest in foreign stocks as an Indian investor.
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