Indian brokerages rush to offer overseas trading facilities for investors

Mathur invests only in technology companies such as Netflix, Amazon, Facebook and Google as he found such companies missing in the Indian software technology space, which has many IT services companies but not many that specialise in products.

“Product companies (in the software segment) are missing in India and hence I strongly believe that overseas investments will only increase from here as Indians are now active users of brands like Apple, Netflix, Amazon and Facebook. Also, these stocks are seeing a huge surge and have outperformed benchmarks in the recent past,” said Mathur, who launched robo-advisory platform Tavaga in 2017.

Reserve Bank of India (RBI) regulations allow a resident Indian to invest up to $250,000 overseas each year under the Liberalised Remittance Scheme (LRS).

Apple, Microsoft, Amazon, Alphabet and Facebook are currently the five biggest companies in terms of market capitalisation, with Netflix also featuring among the 25 biggest listed entities globally.

Other companies, including Alibaba, Visa, Johnson & Johnson, Walmart, Procter & Gamble, Mastercard, Nvidia and PayPal, are also among the largest US-listed companies, with Indians well aware of the brands and the products.

Spike in investor interest in India

“Investors want to invest in new-age technology companies and while India offers such opportunities, there are more opportunities in the international markets,” said Arun Chaudhry, Head, Online Business & Product Development, Motilal Oswal Financial Services.

“Indian investors are now conscious of the fact that diversification of portfolio is important. The newer investors are regular users of companies like Netflix, Amazon and Google, among others, and so know the potential,” he added.

The last few months have seen many brokerages and investment platforms reporting a spike in Indian investors, including the average retail ones, evincing interest and even investing in such companies. It doesn’t come as a surprise that more and more Indian brokerages are jumping on the bandwagon to offer overseas trading facilities.

ICICI Securities, which is among the largest brokerages in terms of the number of clients, is in advance stages of launching a service through which its clients will be able to invest in US stocks.

“We are going to very soon offer our customers the opportunity to invest in US securities through the ICICI Direct platform. We feel we are launching at the right time as there is steady, growing investor interest in direct exposure to many US-listed stocks,” said Vijay Chandok, Managing Director and Chief Executive Officer, ICICI Securities.

Indian brokerages that want to offer such a service to their clients typically join hands with a US-based intermediary that has the regulatory approvals to offer a global trading facility in US stocks.

“There is no minimum ticket size and US markets even allow for fractional ownership of shares, so even small retail investors can build a portfolio effectively. This facility will not only provide investors a growth opportunity but also help diversify their portfolio in terms of geography risk. Investors are also looking at owning stocks of brands they use in their everyday lives like the FAANG pack etc. These stocks are well tracked, providing comfort to many investors,” added Chandok.

Motilal Oswal Financial Services is also gearing up to tap this interest. “We are revamping our platform and will be launching a facility soon that will allow our clients to invest in US stocks,” said Chaudhry.

Discount broking firm Zerodha, which is India’s largest brokerage in terms of number of active clients, is also working on a similar product and will be launching it soon.

“We are working on it and while it is a good facility to offer, the remittance process could prove to be a dampener in the offering due to the costs involved,” said Nithin Kamath, founder and CEO, Zerodha.

“The remittance process involves a cost and hence there is money lost in that spread. Plus, the budget introduced a TDS (tax deducted at source) for remittances above Rs 7 lakh. There is a view that this product is more suitable for high net worth individuals and a retail investor is better off taking exposure through a mutual fund,” added Kamath.

Mutual fund schemes

While an investor can invest in overseas stocks directly through brokerage platforms, mutual funds also offer various options in terms of enabling such investments through systematic investment plans (SIPs).

Schemes such as Motilal Oswal Nasdaq 100 Fund of Fund, PGIM India Global Equity Opportunities Fund, Nippon India US Equity Opportunities Fund, ICICI Prudential US Bluechip Equity and Franklin India Feeder Franklin US Opportunities Fund, among others, help investors in diversifying into international equities.

Last week, Nippon Life India Asset Management announced the launch of the Nippon India Multi-Asset Fund, which will invest in both domestic and international equities through a single scheme.

According to the fund house, the scheme will invest 50 percent of its assets in Indian equities, 20 percent in international equities, 15 percent in commodities and the balance in debt and money market instruments.

“Investors tend to have a home bias and invest mainly in domestic equities,” said Manish Gunwani, Chief Investment Officer – Equities, Nippon Life India Asset Management.

“We believe it is important for investors to have a foot in every major investable asset class, including international equities and commodities, which could help them balance returns across cycles,” added Gunwani.

In a similar context, Gaurav Rastogi, CEO, Kuvera, an online mutual fund investing platform, said that whether one invests directly in international stocks or uses the mutual fund route, the benefits of diversification and currency hedging are available. Moreover, a fund structure is more tax efficient, as rebalancing is not a tax incidence but comes with an annual expense ratio.

In the current calendar year, Kuvera has seen heightened interest in mutual fund schemes that invest in international stocks even though such funds have been part of its recommended portfolio since 2017.

US benchmarks outperforming Indian indices

“We have seen monthly investments in international funds quadruple in the last three months, while three of the five most watched listed funds on Kuvera happen to be international funds,” said Rastogi, highlighting that US benchmarks such as the Nasdaq and S&P 500 have outperformed the Indian indices in the recent past.

In the current year till date, the Nasdaq is up nearly 24 percent while the benchmark Sensex is down nearly 8 percent. Compared to the March lows, the Nasdaq has fared better than the Indian benchmark with a gain of nearly 62 percent compared to a rise of a little over 46 percent in the Sensex. Even the S&P500 and the Dow Jones indices have surged more than the Sensex when compared to the March lows.

Uptick in overseas trading

Meanwhile, brokerages that have already launched an overseas trading facility for their clients have seen a notable amount of traction in the last few months, especially during the lockdown.

HDFC Securities launched its Global Investing platform around 10 months back and currently has about 50,000 registered users, who have cumulatively traded shares worth Rs 450 crore. Further, the platform is registering 50 percent month-on-month growth.

“Earlier, high-net-worth individuals used to invest but ever since we launched the Global Investing platform, smaller investors are also investing,” said Nandkishore Purohit, Head, Digital and Distribution, HDFC Securities.

HDFC Securities is also in the process of launching a quasi advisory kind of product called Stacks, which will essentially be a basket of stocks created by renowned US-based investment advisors that a customer can subscribe to and invest in at the click of a button.

“While investing amounts have grown, investing frequency and activity have also surged. Trading behaviour has gone up in the pandemic. Smaller investors are entering the market, with the average account size dropping from Rs 6 lakh to Rs 3.5 lakh between March and June. Tesla, Google, Amazon, Microsoft, Alibaba, Tencent, Apple, Facebook, Netflix, Shopify are some of the frequently traded stocks on the platform,” added Purohit.

Seeking diversity

Market participants believe that the nationwide lockdown months, which saw a huge surge in the number of new investors entering Indian equity markets, brought in many young, new-age young investors heavily exposed to global digital companies and keenly aware of the importance of diversification in these volatile times.

“There are at least two benefits of international investing. One is diversification, which means access to global companies that are not listed in India — this gives an Indian investor access to global growth stories and global best in class companies. Second is currency hedging since international stocks are generally denominated in US dollars,” said Rastogi.

According to Purohit, during the recent market volatility and the crash in the domestic markets, about 65 percent of investors on the Global Investing platform managed their investment better and were actually able to get a smart return of 15-25 percent due to their international diversification approach.

“Many Indians wish to diversify their portfolio from an international perspective and with the liberalised remittance scheme permitting overseas investments up to $250,000 per year and several brokerage houses now facilitating such investments, there is a rise in the appetite for such investments,” said Lloyd Pinto, Tax Partner, Grant Thornton India LLP.

According to data from the central bank, Indian resident individuals invested a total of $431.41 million in overseas equities/debt in 2019-20, which was a tad higher than the previous fiscal year’s $422.9 million. Further, the investments into overseas equity and debt under the Liberalised Remittance Scheme has more than doubled in the last five years as 2014-15 saw such outflows of less than $200 million.

The downside

However, there are a few deterrents and risks as well when it comes to overseas investing. The biggest risk is the currency fluctuations that would directly affect the returns. The cost involved in making such investments and the taxation structure are also a deterrent if not a risk as these factors impact the overall return.

“Overseas investment is expensive as the intermediary charges are much more than what an investor pays to trade in the Indian markets. Plus, there is the currency risk involved because if the rupee appreciates then the returns get affected,” said Mathur.

According to estimates, brokerages charge between $1 and $6 per trade though there are certain pricing models in which an annual charge is levied on the investor while levying a lower fee on every trade. Some even charge on a percentage basis instead of a fixed fee per trade.

The tax rules are also different from those that are applicable on the capital gains arising from sale of Indian shares. While an investor will be levied tax only in India, the threshold for ascertaining whether it is a long-term gain is pegged at two years instead of one year, as applicable on domestic equity.

Long term capital gains tax is computed at 20 percent with indexation benefits while the short term capital gains tax — if the shares are held for less than 24 months — is applicable as per the individual’s income tax slab.

However, while capital gains are taxed in India, dividend income arising from US stocks are taxed in the US though Indian investors can claim a tax credit in India.

“Individual shareholders who are Indian tax residents and those who don’t hold US citizenship or a green card will not be subjected to US tax on capital gains arising when they sell the US stocks. However, dividends are taxable in the US. The India-US tax treaty provides a withholding tax rate of 25 percent for dividends paid to individual Indian resident shareholders by a US corporation. A resident Indian individual may be able to take credit for withholding taxes against their Indian tax liability,” said Pinto of Grant Thornton.