Globalization and the opening of cross border investing have allowed companies the provisions to invest in any economy. As an Indian investor, you also have the option to buy into foreign stocks and use smart investing to grow your portfolio and gain higher returns from foreign markets. However, let’s first address what foreign stocks are, to begin with.
What are Foreign stocks?
Stocks from companies that are foreign — or based out of India — are known as foreign stocks. These giant companies which are nondomestic make for a great investment option, similar to domestic blue-chip companies. When one chooses to invest in foreign stocks, they can balance out the risk in their portfolio and take advantage of the lucrative opportunities available in foreign markets. Here are three ways investors in India can invest in foreign stocks.
Indian fund houses with foreign tie ups
One of the easiest ways to invest in foreign stocks is through Indian fund houses. This allows investors to access foreign stocks without the hassles of having to ask for permission or taking risks when it comes to investing in foreign currencies. To discover Indian fund houses offering these opportunities, one can look for names like “Emerging Market,” or “Europe Focus.” These names suggest that these mutual funds have invested in foreign stocks via a local market. The movement of these stocks can easily be tacked by looking at the NAV of the mutual fund purchased in India.
Another option for foreign share trading is to consider funds of funds (FoF) mutual funds. These mutual funds purchase units in international stock. Not only can you keep a lookout on the economic changes seen in the international markets, but you also get a cushion for the volatile performance in the Indian stock market. Hence, invest in foreign stocks through a fund of funds investment which can help you with falling Sensex by offering a hedge against it. A slew of global companies have outperformed peers extravagantly by large margins. Diving into their success can be easily carried out through FoF.
A slightly more direct route to foreign share trading that requires substantially more investment is to directly invest in international funds. According to RBI (Reserve Bank of India), Indian residents have the option to invest an upper cap of $250,000 in direct foreign investments each year, without any permissions. This is part of RBI’s Liberalised Remittance Scheme (LRS).
Although there is an annual cap on the total amount of funds invested in any given year, within the international fund itself there isn’t any limit. You can easily open a trading account with an international broker. You do not require a foreign mailing address (in the US at least) to open an account with an international broker from the United States.
The third option for foreign share trading is to invest in exchange-traded funds. The prices of the average ETF fluctuate all day. It is bought and sold throughout the day. This differs from mutual funds — which are sold or bought about once per day after the market closes. You can buy exchange-traded funds available on international indices which gives requisite exposure into a basket of international stocks. You do not require exposure to foreign markets to access these funds. Indian brokers also offer exchange-traded funds as investment options directly from a local market.
Do remember to make that the ETF you choose to invest in is registered with the Securities and Exchange Board of India. By investing in ETFs one reduces their training risk, as these funds — to a large extent — simply replicate the movement of an index. Additionally, the expense ratio of ETFs is significantly lesser than that of a mutual fund. To invest in ETFs you will require a brokerage account with either an Indian company or an international one. However, this is all you need to get access to these funds.
Now that you are aware of three different ways to access foreign share trading, it’s crucial to address the risks of doing so. Foremostly, there is the risk of currency exchange. Even if you earn profit from your foreign stocks, falling rupee rates can affect your exchange rate and increase your risk of loss.
International trading accounts are also a lot more expensive to open than trading with Indian brokers. The margin money requirement is significantly higher at present when compared to the average Indian broker. Additionally, the brokerage charges themselves are higher. In the US it is 0.75% to 0.9% per trade. Being wary of these risks can help you make smart investment choices in foreign shares.