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Key factors to consider for successful global investments
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6 min read | Updated on July 22, 2024, 10:25 IST
SUMMARY
International investing sounds very exciting. But what is the best, most cost-efficient way to go about it? What are some key regulations one should be aware of? What have historical returns been like? In this blog, we give you a comprehensive insight into how to invest outside India.
MFs can help you invest in overseas markets
Investing in foreign stocks can be exciting for Indian residents looking to diversify their portfolios and tap into global markets.
What are the reasons to consider investing abroad? Nearly 96% of financial market opportunities are outside India as India accounts for ~4% of global market cap. Besides this, as shown in the table below, winners change yearly, and investors could benefit from global diversification.
| Year | 2013 | 2014 | 2015 | 2016 | 2017 | 2018 | 2019 | 2020 | 2021 | 2022 | 2023 |
|---|---|---|---|---|---|---|---|---|---|---|---|
| USA | 50.1 | 16.4 | 6.3 | 14.6 | 15.3 | 4.2 | 34.3 | 24.5 | 29.4 | -20.8 | 8.5 |
| India | 15.2 | 28.3 | 0.0 | -1.1 | 30.2 | 0.0 | 8.3 | 11.4 | 27.1 | -9.4 | 19.1 |
| China | 17.2 | 11.6 | -3.4 | 4.1 | 45.4 | -11 | 26.4 | 33.6 | -20.0 | -22.1 | -14.3 |
| World | 44.6 | 8.2 | 4.2 | 11.2 | 16.7 | 0.0 | 31.4 | 19.2 | 24.1 | -18.2 | 19.8 |
| Europe | 42.3 | -4.5 | 2.2 | 3.1 | 19.5 | -6.2 | 27.8 | 9.2 | 19.2 | -15.3 | 15.8 |
| Asia | 17.7 | 8.1 | -5.2 | 8.4 | 34.2 | -6.4 | 21.5 | 28.1 | -3.2 | -21.2 | 8.5 |
Source: MSCI; The above returns are based on MSCI indexes for respective regions.
How can you invest overseas?
Indians can invest abroad in various ways:
- Investing in foreign equities/debt through domestic or foreign brokers.
- Investing in international mutual funds and ETFs (domestic MFs that invest internationally)
- Investing in foreign stocks through the international stock exchange established in Gifty City (IFSC).
Why consider investing via MF/ETFs?
International mutual funds and ETFs offer several advantages for Indian investors looking to invest abroad:
| Mutual Funds / ETFs | Direct Investment | |
|---|---|---|
| Cost | As high as 2-3% (Expense Ratio) | 8-10% (Bank Charges 4-5%, Currency exchange charges 2-3%, Brokerage upto 1%) |
| Diversification | Yes | No |
| Risk | Lower | High |
| Professional Managed | Yes | No |
| Compliance | Lower | High |
| Investment Thresholds | Lower | High |
| Taxation - TCS | No TCS | 20% TCS |
Which funds can help you invest?
Several mutual funds in India offer exposure to international markets. These funds invest in a diversified range of international stocks and securities, with exposure to global markets.
Below are the top 15 funds (by fund size)*
| Scheme | Fund Size (in Cr) | Annualized 1-year return | Annualized 3-Year return |
|---|---|---|---|
| Motilal Oswal Nasdaq 100 FOF Scheme | ₹5,051 | 48.2 | 28.6 |
| Franklin India Feeder Franklin US Opportunities Fund | ₹3,558 | 41.9 | 22.2 |
| ICICI Prudential US Bluechip Equity Fund | ₹3,031 | 17.7 | 15.9 |
| Edelweiss US Technology Equity FoF | ₹2,337 | 45.1 | 27.2 |
| Edelweiss Greater China Equity Off-shore Fund | ₹1,301 | 10.8 | -3.5 |
| HDFC Developed World Indexes FoF | ₹1,242 | 33.0 | N.A. |
| DSP US Flexible Equity Fund | ₹909 | 29.1 | 18.2 |
| Axis Global Equity Alpha FoF | ₹896 | 32.4 | 18.5 |
| DSP World Gold FoF | ₹878 | 52.5 | 17.5 |
| DSP Global Innovation FoF | ₹838 | 43.2 | N.A. |
| Kotak Global Innovation FoF | ₹818 | 31.5 | N.A. |
| Axis Global Innovation FoF | ₹568 | 40.9 | 20.5 |
| Invesco India - Invesco EQQQ NASDAQ-100 ETF FoF | ₹415 | 44.9 | N.A. |
| Aditya Birla Sun Life NASDAQ 100 FOF | ₹398 | 44.8 | N.A. |
| Bandhan US Equity FoF | ₹319 | 49.9 | N.A. |
| Invesco India - Invesco Global Consumer Trends FoF | ₹309 | 21.8 | 6.6 |
| ICICI Prudential Global Advantage Fund (FOF) | ₹308 | 23.9 | 10.4 |
| Aditya Birla Sun Life Global Emerging Opportunities Fund | ₹271 | 35.3 | 15.4 |
Source: Value Research. *Data as of 18th July-24. FoF stands for Fund of Fund which means domestic MFs investing in foreign MFs.
Note: the list above is neither exhaustive nor a recommendation.
How should you analyse these funds?
Just like you would any other fund, look at historical risk-adjusted returns, fund manager track record, and expenses. Those things remain the same. But over and above that, additionally, one should consider:
- Underlying country/region dynamics: Ensure you understand the underlying macro factors (GDP growth, inflation, etc) of the country you choose to invest in.
- Currency risk: Since the fund is investing in foreign securities, adverse currency movements can impact your returns. Check the historical impact of currency conversion on returns.
- Political and country-specific risk - It's important to assess the macro-economic and political scenario of a country
Pros and cons of investing abroad:
| Pros | Cons |
|---|---|
| Diversification - investing abroad reduces country risk | High fees - investing abroad can be costly which will reduce your effective returns |
| Higher returns - investing abroad can help to leverage opportunities available globally | High risk - exposed to country risk, political risk, currency fluctuation risk |
| Beyond domestic - Investing abroad can give you exposure to emerging technologies and unique companies not available in domestic markets | Compliance And Taxation - Direct foreign investment could lead to complex taxation and compliance |
What are some key regulations to know?
Indian residents can invest overseas through the Liberalised Remittance Scheme (LRS), which allows them to invest up to $250,000 per financial year for permissible investments,
Indian residents remitting funds outside India for investing abroad must pay a Tax Collected at Source of 20% irrespective of the amount. In terms of reporting, while filing the returns details of foreign equities held need to be specifically disclosed.
From an overall fund perspective, RBI regulates fund inflows and outflows. Currently, there is an overall industry-level limit of $7 billion for mutual funds that invest outside India. This limit was last time reached in 2022.
Within this, there is a $1 billion limit for funds investing in overseas ETFs. This limit was last reached in March 2024.
Conclusion
Investing abroad can be a great avenue for Indian investors looking to diversify their portfolios and tap global markets. Mutual funds provide a convenient way to invest in foreign markets, offering benefits of diversification, professional management, and lower investment limits.
That sad, investing abroad comes with its own set of risks. Before investing, an investor should carefully assess the risks and fees of overseas investments and consult with a professional financial advisor before making any decisions.
Disclaimer: This article is for informational purposes only and must not be considered investment advice. Investors should consult with experts before making any investment decisions.
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