When it comes to international equity investment, India still remains one of the most under penetrated countries where only few have dared to venture into it. "Only 0.1 per cent of India's financial wealth is invested overseas. This is in stark contrast to developed markets where investors diversify as much as 10-20 per cent of their wealth overseas," says Swastik Nigam, Founder & CEO, Winvesta.
But things are changing fast. "There has been a drastic fall in the total remittance - which is a direct reflection of COVID-19 on non-investment remittances. But most revealing is the fact that while the investment figure has dropped, as a percentage, it is 17.6 per cent, three times of what it was in FY20," says George Mitra, CEO and Co-founder, Fintso. That shows the resilience of international investment despite the crisis. As per Stockal about 4,000 new accounts are being opened every month on its platform. Currently, it has 50,000 investors on board.
Why people are interested in international stocks
Besides the lure of investing in popular international stocks, the reasons are aplenty why people want international exposure. "During COVID-19 crisis, investors could see how geographic diversification can help their portfolios. The Indian markets have not performed as well as the US market over the last few months. Thus, having some portfolio allocation to the US would have improved overall portfolio performance," says Viram Shah, CEO and Co-Founder, Vested Finance.
As per Winvesta, the US markets outperformed Indian markets by over 200 per cent in rupee terms in the last decade. Almost 40 per cent of the revenues of S&P-500 companies are from outside the US. Thus, when you invest in the US, you may inadvertently be benefiting from global diversification.
"Several factors are causing this shift for Indian investors. Consistent outperformance and resilience of the US markets is a major one. Investors are also looking to be a part of the growth story of the brands they know and use, a growing number of which are listed in the US. Many of us also have current or future liabilities in foreign currencies and want to reduce the rupee risk by investing in dollar assets," says Nigam of Winvesta.
Besides US investors are going for investment in many other countries as well. "Multiple factors motivate an individual to invest in the stock market of any country. These include the country's economy, relationship with other countries, the investment climate in the country, and the degree of protection they offer to a foreign investor from frauds and bankruptcies," says Ravi Kumar, Co-founder & CEO, Upstox.
The countries that Indian investors prefer more are USA, Canada, UK, Germany, France, Japan and Hong Kong as these countries are known to host some of the most powerful and well known brands in the world.
"It also depends on the familiarity of brands/companies listed on the stock market, for example FAANG stocks (Facebook, Apple, Amazon, Netflix, Alphabet) are valued by many investors for their alpha returns. It also includes an analysis of various mutual funds, exchange-traded funds (ETFs), or stock and bond offerings in those countries," adds Kumar.
The barriers are coming down
Investors would have loved to invest overseas earlier also but there were many hurdles which made the process extremely challenging. Earlier if someone had to directly invest internationally, they would face the barriers like high entry and commissions, lack of sound technical tools to invest online and lack of information.
"The user experience for an investor to invest in US stocks was poor. The account opening process would take days, and to transfer the funds one would need to visit a bank branch, and the platforms were not localised for the Indian investor's pain points. While Indian investors are familiar with the local markets, information on how to invest in the US markets was very scarce. One would have to spend a lot of time to understand things like how taxation works, how to go about the fund transfer and what kind of ETFs are available, etc," says Shah of Vested Finance.
However, things have significantly changed now. With advancements in technology, the barriers of international investment for Indian investors have fallen substantially. It is now getting increasingly convenient to invest overseas.
"Availability of homegrown digital investment platforms has accelerated the whole process of global investment making it easier and hassle free for Indian investors to invest in international stock markets," says Sitashwa Srivastava, Co-Founder and CEO, Stockal Inc.
"We've made it very affordable. There are options where investors can pay as low as 1 cent per share in a trade. Investors can also get access to superior products, user experience and bank logistics support on Stockal by using an annual subscription plan which starts at Rs 650/month or Rs 3,999 per year," adds Srivastava.
The customer experience has now improved in every aspect of investing right from on-boarding to execution and taxation. "Now with a solution like Vested one can easily invest by taking advantage of paperless on-boarding, simplified fund transfers via partnerships with banks and remittance companies, fractional and commission-free investing, advice via our pre-built portfolios called Vests, and taxation support in India," says Shah of Vested Finance.
The options are now wider as it is not limited to some developed markets, but a larger universe of countries is available. "We will soon be launching a global investing service that offers customers an opportunity to invest globally with stocks from 60 exchanges across 25 countries. They can invest in companies whose products and services they have been using, including Apple, Google, Microsoft, Tesla, Amazon, Mercedes-Benz, and Teva, through a single platform," says Kumar of Upstox.
No need for big investment
The dollar-denominated prices of some big brands was one of the biggest hurdles for Indian investors to invest in some of the most preferred brands. "The solutions available until now enforced minimum investment requirements and required investors to buy full shares. For example, you would have to shell out $1,800 (Rs 1.3 lakh) in one go to buy a share of Amazon. Further, commissions were very steep - you would need to pay $5-8 or Rs 350-560 for each trade," says Shah of Vested Finance.
However, the innovative solutions now make fractional ownership possible. "The Upstox Global Investing service offers the option of fractional trading, a facility that enables investors to invest in foreign stocks without being restricted by limited capital. This means, they can own part of a share of a top-valued stock, bettering and diversifying their portfolio. For instance, if the price of a company's share is approximately $35.13, with fractional investing, you can buy 0.1 part of it for just $3.5 (around Rs 250). Investing in the global stock market was never this easy," says Kumar of Upstox
How can you invest overseas?
The overseas investment option is being offered by many other platforms including Stockal, Fintso, UpStox and Winvesta. The biggest convenience that investors can enjoy is quick digital on-boarding process. "With Winvesta, for example, investors can get a US brokerage account digitally in 15 minutes, and invest as little as $1 in their favorite stocks," says Nigam of Winvesta.
Besides offering the digital facility for investment many of these platforms also bring advisory services for willing investors. "Fintso provides the platform to advisors to help their investors do the right thing that includes assistance in doing asset allocation appropriate to their clients' risk profile, and help execute underlying investments seamlessly," says Mitra of Fintso. So if you want to invest with some hand-holding from expert you can get it right there.
The limit on overseas investment
When it comes to sending money to or receiving money from overseas it has to follow the limit prescribed for foreign exchange transfer. "The annual limit prescribed by the Reserve Bank of India for remitting money abroad is $250,000 per financial year per individual. This limit may be changed by the RBI in the future," Kumar of Upstox says.
However, you can invest much bigger amount if you include your family members. "Under the Liberalised Remittance Scheme (LRS) of the RBI, a retail Indian investor can invest and spend up to $250,000 overseas per financial year. This limit is individual, so a family of four can invest up to $1 million overseas every year," says Swastik Nigam, Founder & CEO, Winvesta.
Although many affluent investors used LRS earlier, it was not for investment. Things will change now. "LRS has been used by UHNIs extensively, especially for children's education, travel abroad, and investment. The vast majority of investors were simply not aware, or even if they were, their ability to execute was limited. This was due to the fact that proper asset allocation is necessary for an investor - to provide both diversification as well as opportunities. Having assets in a different currency and a different market is a key component of this. The inclusion of LRS is due to this reason," says Mitra of Fintso.
Investing through mutual funds
Direct equity is a route preferred by savvy investors but many other investors prefer the mutual fund route. There are many Indian mutual funds that offer the benefit of international equity investment.
"In terms of mutual funds, the overall mutual fund industry has been allowed to invest $7 billion in the international markets. Earlier the limit used to be $5 billion, which was hiked to $7 billion in 2008," says Shah of Vested Finance. At current currency exchange rate, it would amount to more than Rs 50,000 crore, which is very big.
For investing in MFs you do not need to go through the currency conversion exercise as these are available in rupee.
Currency risk that you should mind
The bigger trend that works in favour of overseas investment is that most emerging markets currencies are more volatile than those of developed markets and follow a path of long-term depreciation.
"Historically, rupee has been depreciating against the dollar at 3-5 per cent annually. Over the last year, this has been as high as 9-10 per cent. In the last decade, for example, S&P500 outperformed the Sensex by about 50 per cent. However, if you were to add rupee depreciation to it, the outperformance was over 200 per cent," says Nigam of Winvesta.
So far on long term basis it has been a one way road. "There is definitely an additional foreign exchange risk in investing in the US market and an investor should be aware of that. When investing internationally, an investor would be investing in dollar and rupee has depreciated 39 per cent against the dollar in the last 10 years. Thus, one has the opportunity to not only hedge against the rupee, but also benefit from the long-term rupee depreciation," says Shah of Vested Finance.
However, this trend cannot be taken for granted. It is better to understand the risk completely and have a plan to mitigate it. "This is a good time for investments but people should think of this as long-term diversification instead of short-term trading. In fact, keeping money in USD or GBP etc. will reduce overall volatility in one's portfolio," says Srivastava of Stockal Inc.
Should you invest?
Before you invest in equities, you need to understand underlying risks. "International equity investing makes sense for those with high risk appetite. We are perfectly happy buying electronics, cars and even eating food of companies listed abroad and therefore it makes sense to be able to take exposure to these companies and to diversify the geography-specific risk," Rishad Manekia, Founder and MD, Kairos Capital says.
Just like domestic market the possibility of a correction in global market cannot be ruled out. "The US stock market has been on a strong bull run over the last decade, which is why many investors prefer to invest in the US markets. However, the valuations in those markets are very high and any further exposure must be carefully considered," says Manekia of Kairos Capital.
Therefore, it is always advisable not to concentrate your exposure to single country or to very few stocks. If you do not have the complete understanding it is better to take help from experts. "When investing abroad, it is always better to diversify the risk across many geographies including European and Asian markets. Ideally, it is better for investors to talk to a financial advisor and understand the associated risks, process and other aspects of investing in international equities before taking a plunge into it," says Manekia.