A smart investment strategy requires choosing a good mix of various asset classes, which can match up to individual financial goals. Equally important are an investor’s risk profile and the time horizon for which he/she wants to stay invested. Any financial advisor would recommend investors ensure diversification through asset allocation. This is because investment in a wide range of asset classes ensures portfolio diversification and also offers a healthy risk-reward balance.
Every Indian investor must design his/her portfolio by considering these factors and also look at international investment to broaden the investment horizon. So why does international investment matter?
Let’s find out! Here is everything that an investor needs to know about international investing.
What are international investments?
International investments for Indian investors refer to the practice of investing in assets or securities outside of India’s borders. It allows investors to diversify their portfolios by gaining exposure to global markets, industries, and economies. International investments can include stocks, bonds, mutual funds, exchange-traded funds (ETFs), real estate, or other financial instruments. They offer the potential for capital appreciation, access to new investment opportunities, and exposure to different currencies.
It is important to note that they also come with risks such as currency fluctuations, geopolitical factors, and varying regulatory frameworks. Indian investors can engage in international investments through various channels, including offshore funds, global mutual funds, or direct investments.
Why should you consider international investing?
Here we have listed down some of the top reasons for Indian investors to consider international investment:
- Investment in reputed global companies – With international investment, you can invest in companies that enjoy a good reputation across the world and offer products or services that are extensively used globally. Today, many Indian investors are also consumers of such products and services offered by global firms. Through international investment, Indian investors can get a chance to buy stakes in such companies that they like.
- Benefit from growth opportunities – It also offers an opportunity to make the most of growth opportunities offered by global companies as investors can experience a slice of a larger pie.
- Better risk-return balance – Indian investors limit their portfolio risk coming from investment in local stocks by international investment, as rewards through foreign stocks can be significant. While stock returns heavily depend on market movements, developed economies tend to have lesser market fluctuations as compared to developing markets like India.
- Access to developed economies – International investment gives exposure to companies that are in developed economies and are often resilient to crisis. Also, foreign investment can help in balancing the impact of market cycles, as foreign economies could be doing well at a time when the local economy may go through a downturn. Through international investments, investors can focus on economies that are on the growth path and leverage future benefits.
- Possibility of holding fractional investment – Indian investors can also invest partially or fractionally in foreign stocks. This gives exposure to a portion of a unit of stock. Many Indian brokerage houses offer US fractional share investment options. This way, an investor can get a chance to broaden his/her portfolio through investment in stocks of various companies.
- Reap benefits of currency differences – Through foreign market investment, an Indian investor can make the most of currency differences. There can be strong earnings, especially when the home currency loses some value while the foreign currency has a strong performance. However, the opposite can also be true, and this may cause investment risks.
How Indian investors can invest in foreign markets?
Here are two major ways in which Indian investors can invest in the foreign markets:
Through brokerage firms
Who hasn’t heard of the acronym FAANG which stands for Facebook, Amazon, Apple, Netflix, and Alphabet(Google)? However, these companies are not Indian and are therefore not listed on Indian stock exchanges. This restricts the direct access of Indian investors to these stocks.
India has many established brokerage houses that have tie-ups with various foreign brokerage houses. The idea is to allow investors across borders to easily invest in other country’s listed companies. There are also brokerage houses in foreign countries that let Indian investors to set-up an account directly with them and trade in securities listed on other stock exchanges. You could also try brokerages in India that allow investing in foreign securities.
Through international mutual funds or Exchange-Traded Funds
Investors who are looking to access foreign stocks can also invest in Indian exchange-traded funds or mutual funds which primarily invest in foreign securities. International mutual funds/ETFs pool money from various investors and invest the same in global equities. This is done after thorough research about the companies, study of exchange rate risks, and expected market outlook of the selected companies.
This can be an easier and better way to get exposure to global equities as compared to direct investment through brokers. It also comes with lesser transaction costs as compared to individual stock investment through a broker. Mutual funds also offer professional expertise that comes from the fund manager’s experience. Also, in mutual funds, investors do not have to invest sizable sums and are especially beneficial for new investors.
With the Fisdom app, investors can now easily make investments in international mutual funds from their smartphones. The app allows investors to select funds based on their preference of time-horizon and nature of securities such as debt, equity, etc.
How are international investments taxed?
International investment generally fetches income in the form of dividends, interest, capital gain upon asset liquidation, etc. These are taxable as per the normal tax provisions in the country. When it comes to taxation, international mutual fund investments are treated the same way as debt mutual funds. Here are the applicable tax treatments:
- Short-Term Capital Gains–Gains that are accrued within three years from the start date of investment are considered along with the investor’s income and tax is calculated as per his/her tax slab.
- Long-Term Capital Gains—Gains accrued post completion of three years from the date of investment are charged tax rate of 20.6% with indexation benefits. This offers greater tax efficiency as compared to the 10% LTCG without indexation on Indian equity funds.
- The indexation benefits provide investors with greater tax efficiency on gains, even if the absolute rate of taxation is 20.6%.
Advantages of international investments
Here are the advantages of international investments for retail Indian investors, summarized in bullet points:
- Diversification: International investments provide an opportunity to diversify investment portfolios beyond domestic markets, reducing risk through exposure to different economies, industries, and currencies.
- Access to Global Growth: Investing internationally allows retail Indian investors to participate in the growth potential of global markets, tapping into opportunities that may not be available domestically.
- Currency Opportunities: International investments enable investors to benefit from currency movements, potentially profiting from favorable exchange rate fluctuations.
- Portfolio Hedging: By allocating a portion of their investments internationally, retail Indian investors can hedge against domestic risks and volatility, creating a more balanced and resilient portfolio.
- Sector Exposure: International investments offer exposure to specific sectors or industries that may be more prominent or innovative in other countries, providing opportunities for targeted investments.
- Geopolitical Diversification: Investing internationally reduces exposure to any one country’s geopolitical and economic risks, spreading risk across different jurisdictions.
- Access to Global Brands: International investments provide the chance to invest in well-established global brands, gaining exposure to renowned companies that may not be listed domestically.
- Long-Term Investment Opportunities: Certain international markets may offer long-term growth potential, allowing retail Indian investors to benefit from emerging trends and developments in other parts of the world.
Remember, before making any international investments, it’s important to conduct thorough research, understand the associated risks, and consult with a financial advisor to ensure alignment with your investment goals and risk tolerance.
To sum up, global investment offers investors the opportunity to be a part of the growth story of large international corporations that are renowned across the world. It also provides diversification to an investor’s portfolio. Investors must always take small steps in international investment and aim to get a better understanding of how these function.