He might have just left college, but 21-year-old Kunal Aswani knows more about diversifying risk and allocation than some people twice his age.

For the past eight months or so, Aswani has been burning the midnight oil, buying and selling equities in New York, Tokyo and Europe, as well as actively managing a portfolio of Indian stocks.

Like Aswani, there are several young investors who have realised that the world markets can help them widen their investment opportunities. Armed with little more than a sufficient amount of cash and an Internet account, these global investors are trading on most of the major stock markets, including New York, Amsterdam, London, Dubai, Singapore and Hong Kong.

Many other exchanges also have links to other markets that allow for orders to be routed to the relevant market in the currency of that country.

Says Sudip Bandyopadhyay, CEO, Reliance Money: “The opportunity for stock investment is not limited to the stock markets of India anymore. With increasingly easier access to foreign economies, buying shares of international companies is now a practical option that many investors can consider as part of diversifying their portfolios.”

Nirmal Baid "I invested in Indian stocks when a dollar was worth Rs 48. Rupee appreciation alone has raised my investments by about 20%" Current residence — Mostly in the US Global investments — Over $50,000 in the US through Etrade, TD Waterhouse and Fidelity. Has also invested $25,000 in Indian equities and mutual funds.

It is also an opportunity to take part in the world’s booming economies and growing stock markets. But, like any other investment venture, investing abroad has its own set of benefits and risks. The key is to evaluate the pros and cons to see if this investment avenue fits your risk tolerance. The risks.

Many investors typically choose markets that have high returns and they do not realise that it actually increases their risk. Prudent investors look for a balance and choose global investments that have lower risk of being overly exposed to Indian markets,” says Vineet Vohra, MD & CEO, ING Investment Management.

But what are the typical risks you are likely to face as a global investor? The most serious risks you face when investing in another country will, of course, be any political or economic upheaval in that country, which could lead to a stock market collapse. Apart from this, the differences in market regulations and standards could also prove tricky, especially when it comes to evaluating foreign companies.

V Krishnamurthy "I actively manage my investments in India and the US. I track the performance of my fund and stock investments online." Current residence — Bengaluru (Travels frequently to the US) Global investments — More than $60,000 in the US through funds like Janus and Fidelity; Also invested over $20,000 in Indian equities; overall, his investments have earned over 40% in three years.

Sandesh Kirkire, CEO, Kotak MF, says: “In my opinion, the best way to invest in overseas stocks is to go through the mutual fund route.” His reasoning is based on the fact that if you get into direct investment, you add currency risk, especially in an unfamiliar market where the variables are unknown as the territory is unfamiliar.

Another risk of international investment is the volatility of the currency exchange rate movements. If the foreign currency falls in value, then your investment return also suffers despite the gains your stocks may have made in the market.

For instance, if a dollar investment on the S&P Composite Index had risen by 15% and the rupee appreciation over the dollar in the same period was 12%, the gains from global investing would be nearly wiped out.

Kunal Aswani "I can log in and buy direct equities or indices on many stock exchanges, like Nokia in Finland" Current residence — Mumbai Global investments — More than $3,000 mainly in equities and commodities in the US, UK, Germany, Finland and Hong Kong. Has been investing abroad for less than a year; primary reason was diversifcation; 10-15% of his portfolio has global exposure.

“In many instances, investors may not be aware of the risk-return profile of investments that they are buying.

For instance, Indian investors buy Japanese stocks without fully understanding what type of stocks they are buying, or they buy real estate in London or Dubai without fully understanding the dynamics there. Countries that devalue their currencies are also dangerous pitfalls for foreign investors. You could incur losses practically overnight,” warns Narayan Ramachandran, India-Country Head, Morgan Stanley.

However, Sukumar Rajah, CIOEquity, Franklin Templeton Investments differs: “Investors need not worry about currency risk as typically the impact is reduced over the long term. Such concerns affect only traders. As an investor, you should be clear about your time horizon and investment goal.”

WHAT THE EXPERTS SAY

"Templeton India Equity Income Fund has up to 35% exposure to emerging markets. In 2006, we raised around Rs 20 billion from close to 400,000 investors, which indicates the diversification that Indian investors are looking for. Global diversification remains a sound strategy for equity investors, as it allows them to diversify across markets with varying returns potential." Sukumar Rajah CIO - Equity, Franklin Templeton Investments, India

"The potential markets in which Indians can participate in is wide and therefore, the range of returns is also likely to be wide. The key thing to focus on is that it provides Indian investors an opportunity to diversify their assets. As Indians become wealthier and consume a global basket of goods, it is prudent for them to invest in global markets instead of sticking to the Indian market." Narayan Ramachandran India-Country Head, Morgan Stanley

"Theoretically, the possibilities are endless. However, practical problems come in the way of exploiting these possibilities to their maximum. If information on the asset class of choice in the country of choice was easily available, investors would be able to make informed decisions about proposed investments, which could turn the trickle of such investments into a steady flow." Rajiv Shastri Head, Business Development, Lotus MF

"As of for now, options and the knowledge of how to invest abroad remains in the nascent stage and only a small portion of the investor segment is informed and inclined towards this medium of investment. Many of those who have an asset allocation for overseas securities choose mutual funds as a comparatively less risky proposition." Sandesh Kirkire CEO, Kotak MF

"In developed markets investors place up to 50% of their financial portfolios in overseas assets. Given that global investing is new to India, an allocation of at least 20% to global real estate would give investors an optimum decrease in risk and a corresponding growth in returns." Vineet K Vohra Managing Director & CEO, ING Investments

Another very real risk that you face is the fact that many markets abroad are not regulated by an agency that provides Indian investors with the right of redressal. Needless to say, Indian regulators have no control over overseas investments.

This is likely to affect equity investors in particular. What it costs. You don’t have to be a high networth individual to give your portfolio an international flavour. Investing in equities abroad does not really cost much. For as little as Rs 5,000, you can invest in a mutual fund that has exposure to non-Indian stocks. If you want to directly invest in global equities, and you have a sufficient amount of cash handy, your best bet is to open a non-rupee bank account.

You can start with around $10,000 and begin investing abroad. When you invest in global instruments through an Indian mutual fund, you pay in rupees, which are converted into the foreign currency of choice and stays invested that way. The costs in this case are pretty similar to what you’d pay any Indian fund.

Things get a little more complex if you want to buy funds directly. Online platforms, such as fundsupermart.com or iFastFinancial.com, offer you access to specific types of funds. The two sites mentioned here, for instance, allow you to buy over 300 open-ended global funds registered in Singapore. Says Desmond Lim, regional distribution director, iFast Corporation: “We offer a platform to purchase funds with global exposure where only commission on the value of fund invested through us is charged.”

The charge is within the 5-5.5% that distributors charge in Singapore, but compared to the 2.25% that one pays in India, that seems a bit steep. You will have to pay a similar amount when routing investments through a bank account you may have in a foreign location. Your other option is to invest through the wealth management services offered by banks and other intermediaries.

What you pay in such cases will depend on the wealth management team, which works towards a goal that is set when you sign on. The costs will be based on the kind of returns that the collective portfolio earns through different investment options. If you opt to invest directly in equities, factor in the brokerage that you’ll have to pay.

There are two options. One is a fixed fee, which is a flat rate and does not depend on the number of trades or even on the value of trades you execute through that broker. The other fee is variable, and depends on the volume and frequency of your trades. Nirmal Baid, a global investor whose portfolio includes instruments in the US, Canada and India, says: “An offer of $10 brokerage on every transaction makes sense only when you are trading at, say, a $10,000 level or 0.1%, compared to, say, 10% if it were only a $100 trade.”

Apart from the brokerage, you will also have to pay a one-time joining fee, which is generally around $10 or its equivalent. Another option is to invest through an Indian firm that has tied up with foreign brokerages. For instance, ICICIDirect has an agreement with Penson Financial Services in the US, so customers can trade on the US stock exchanges using the ICICIDirect platform.

For this, you will have to pay a fixed one-time fee of Rs 999, as well as a broking fee of 0.75% of the transaction or about $9, whichever is higher. Reliance Money’s tie-up with UK-based CMC Markets and Chicago-based Alaron Trading (for commodities) allows you to trade on almost all the major international indices, currencies, commodities and stocks.

The initial investment is $700, which can be transferred from your bank in India. Just remember that knowing the risks and the costs are not enough. As Arnav Pandya, an Ahmedabad-based certified financial planner, says: “People need a lot more to understand about the overseas markets and currency risks, the safety aspect of remitting money abroad and opening of an overseas bank account.”

 

OPTIONS FOR GOING GLOBAL
Equities
1. Open an account with a bank that allows access to investments abroad and uses the online and offline platforms to invest
2. Go to an intermediary in India, like Reliance Money or ICICIDirect, which has arrangements with broking houses abroad who let you trade on their platform
3. Go online to sites like Etrade or Charles Schwab, satisfy the international investor criterion and be ready to trade
Mutual funds
1. Use the existing route that fund houses in India offer to invest in funds with global investing themes
2. Use a global bank account to invest in mutual funds abroad
3. Sign up with an intermediary outside India such as iFast or Fundsupermart and invest in the range of global mutual fund options they offer
4. Use the wealth management route offered by banks and speciality players like Merrill Lynch to invest in global mutual funds