What happens when a stock rises 17 times in 15 days? You jump after the 15th day, of course! This is the story of GME (the stock ticker for American electronics games retailer GameStop) and kickstarting its equity journey with an ‘overseas stock’ – of Indian investors entering the US market. and how? After reading about it in reddit groups!
There is no doubt that investing in a foreign country can help diversify your portfolio. And in particular, when it comes to investing in the US, shares of companies give you the value of everyday life (Google or Apple or Netflix). The question is what is the prudent way to invest in America and how much can you expose yourself to a market you know little about. Therefore, here are things that you should know before investing internationally.
First, choosing a foreign share is no different from choosing equity shares locally. Business and financial fundamentals of the company, moat, balance sheet quality and governance, all matters. If not, foreign stocks can also go down to be penny stocks and destroy your wealth.
Next, you should know which markets to choose. A market that behaves like India cannot offer any diversification. So, you need to choose markets that are less correlated or that offer different opportunities.
Your profit from international investment comes from local market returns and currency movement.
For example: The annual five-year return of the Nasdaq 100 index (as of March 12, 2021) was 25%, as opposed to the 26.5% return of Indian funds investing in the same index. Apparently, the excess value came from depreciation of Rs. But the reverse may also be true that you may have lower returns on appreciating the rupee. So, currency moves can benefit or harm you.
Cost included
When it comes to investing internationally, you should be aware of upfront costs, recurring costs and taxation.
Firstly, when you buy foreign currency, the exchange rate may not work in your favor as the currency exchange fee charged by your bank / broker for you may not be competitive. This is the upfront cost you have incurred – somewhat of an entry load as a fund manager put it.
Second, know your tax laws. A new rule of tax collection at source for foreign remittances in 2020 was seen at 5%, up from ₹ 7 lakh. While this can be claimed in your tax return, you should know that if you are investing a large amount then it is a cash flow for you.
Third, you should know about tax treatment including dividends or capital gains and inheritance tax in the country in which you are investing. In India, gains from listed foreign shares are taxed separately from local equity shares. If held for more than two years, it is considered long term and taxed 20%. Otherwise, it is called a short-term gain and your slab rate is taxed. In the fund route, they are treated like debt funds for tax purposes. Dividends are also taxed. You may need an auditor to help you with all these complications and his / her fee is an additional fee!
Fourth, brokerage spending on buying or selling foreign shares is not as low as locally. This is because your local broker is usually tied to a foreign broker and that brings the cost of the intermediary to your total cost.
Apart from the cost, you should be aware of the pedigree of international brokers, their registration with the regulator of the foreign country, in addition to the history of the local firm (as there are many new start-ups in the region).
How to?
Despite the above points, there is no denying that your portfolio will prosper if you add some international flavor to it. Instead of going the stock route, taking the ETF / Passive Fund route, especially in the US, many needs can be met.
One, you do not have to choose stocks that burn your fingers that may go bust. Two, passive investing is known to outperform active funds most of the time in the US, and the country has a wide range of ETFs. Three, you can do this via a direct investment route (buy ETFs through brokers) or, still easier, use Indian funds that invest in such indices in the US. The latter is hassle-free because you invest in rupees (there is no remittance involved)) and yet benefit from any currency depreciation. Expenses are quite low (less than 0.5%), and you don’t even need a broker account if you use the fund route.
Instead of complying with FEMA, RBI’s Liberalized Remittance Scheme (LRS) and tax law, is it not a simpler route?
But some cavites apply. As with everything, the excess of anything is bad. So, keep your exposure at 10-20% of your portfolio. Second, as a rule in equities, do not create a beeline given the high returns. That is bad timing. Third, you should invest only to diversify; Not with the intention of earning more returns from India. GME rockets can also crash into flames!
(The author is co-founder, PrimeInvestor.in)
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