'Indian investors should allocate 10-15% of portfolio to international markets'

Edited excerpt:

A) As part of the Union Budget 2020, the government has proposed to introduce a 5 percent tax collection at source on transactions undertaken via the Liberalised Remittance Scheme beyond a total of INR 7 lakhs or approximately $10,000 in a year.

Transferring funds for investments also falls under the LRS. This tax collected will be available as credit to the payer when they file their taxes. The 5 percent can also offset any capital gain taxes that would need to be paid in India on foreign investments.

While we are awaiting further details on this announcement, we still believe that investing abroad is a much-needed geographic diversification strategy for investors in India. They should look to allocate 10-15% of their portfolio to international markets.

A) Vested is the first and only commission-free platform for investors in India to invest in the US stock market.

We are an Investment Advisor registered with the SEC and have created an easy mobile and web application that allows investors to submit their KYC in less than 5 minutes. Once the KYC is submitted, the brokerage account opens in 2-3 business days.

Once an account is open, investors can transfer funds into their account via the RBI’s LRS scheme. We have partnered with banks to simplify this fund transfer process.

Depending on the bank, either you can do it online or a Vested representative will pick up the forms and submit it to the bank branch on your behalf.

Investors can start investing as soon as the account is loaded. We provide pre-built portfolios called Vests to simplify the investor’s decision.

Fractional investing is also possible, so one can create a truly diversified portfolio by investing as little as $1.

A) The majority of the investors in India today have completely locally concentrated portfolios. The first step for these investors is to understand that geographical diversification is necessary to reduce country and currency risk.

In the US, on an average 15 percent of investors’ portfolios are allocated to international markets. Once an investor is convinced about geographic diversification, there are a couple of ways they can go about doing it:

1. Investing in Mutual Funds that have international exposure: This includes the Franklin Templeton US Feeder fund or the Parag Parikh Long Term Equity Fund. This is the easiest way to get started with geographic diversification. However, investors cannot pick individual companies and expense ratios can be high.2. Open an account with a US broker: Powered by technology, this method of investing is easier and more cost-effective than it has ever been.

Now one can open a US brokerage account for free via an app, transfer funds online (through select banks), and start building their US Dollar investment portfolio.

However, investors should note that there are costs associated with the fund transfer, so starting with small amounts might not be feasible. We created Vested to enable investors in India to open US brokerage accounts and build their portfolio in a very easy manner.

Q) Opportunities or challenges that investors face while investing in US markets and what is the solution?

A) The US market is globally the largest and most liquid market, so there are plenty of interesting opportunities. It allows investors to invest in a lot of the consumer brands that they might be using on a daily basis.

In fact, they can also invest in companies that they don’t use but are believers of, for e.g. Tesla is one of the favorites on our platform.

Another opportunity that often goes unnoticed is that the US markets offer the opportunity to invest in the entire world.

There are ETFs available that allow exposure to global stock markets as a whole as well as individual countries like China, Argentina, Vietnam, etc.

One of the challenges that an investor might face is investing as per their risk profile. If an investor is saving for his or her child’s foreign education coming up in the next 3 years, they should avoid investing directly in stocks and rather create balanced equity and debt portfolio via ETFs.

Further, there exists a currency risk since funds are converted into USD and then back to INR upon withdrawal. However, over the last 10 years, the Rupee has depreciated 4 percent each year against the dollar. So, this 4 percent has added to INR returns for investors.

Q) How and why should retail investors be investing in new emerging economies?

A) The idea of investing in other emerging markets is definitely intriguing. Emerging markets are poised to grow rapidly in the coming years, and rising GDP is typically accompanied by rising income.

This might tempt an investor to assume that the local stock market in these countries will also flourish. This is not necessarily always true. While some emerging markets such as Brazil and China have performed well, data has shown that high GDP growth does not correlate with high stock market growth.

The best way to invest in emerging economies is to invest through ETFs traded on the US markets. For example, BlackRock’s iShares has an ETF that invests in Chinese mid to large-cap companies. The expense ratio of this ETF is only 0.59%.

And, if one does not want to pick specific countries, there are emerging market ETFs that invest in most of the of the emerging markets. For example, BlackRock’s EEM or Vanguard’s VWO ETFs are worth looking at.

Q) Views on taxation while investing in US stocks?

A) Taxation is different from investing in local stocks but once the rules are understood, it can be straightforward. Indians investing in US stocks could face two types of taxation events:

1. Taxes on investment gains:

For this they will be taxed in India only, they will not be taxed in the US. The amount of taxes that have to be paid in India depends on how long the investment is held. 24 months is the long-term capital gain threshold and the long-term tax rate is 20% with indexation benefit. Below 24 months is short-term capital gain and is taxed according to the investor’s income tax slab.

2. Taxes on dividends:

Unlike investment gain, dividends are withheld in the US at a flat rate of 25%. However, US and India have a Double Taxation Avoidance Agreement (DTAA), which allows taxpayers to offset income tax already paid in the US. The 25% tax paid in the US is made available as Foreign Tax Credit and can be used to offset income tax payable in India. The dividend is then taxed as regular income in India

Q) What are the risks involved in investing abroad?

A) The key additional risk undertaken is currency risk. Although as described earlier, the Rupee depreciation trend helps mitigate the risk. Also, to ensure that funds are always protected, one should make sure to invest through regulated entities.

One of the other things to check when investing is whether the broker is registered with the SIPC or the Securities Investor Protection Corporation.

This organization ensures your brokerage account up to $500,000. So, in case anything happens to the broker, the funds are protected. Further, under FEMA laws leverage and investing in speculative products (derivatives) are not allowed, so one should refrain from that.

Disclaimer: The views and investment tips expressed by investment experts on Moneycontrol.com are their own and not that of the website or its management. Moneycontrol.com advises users to check with certified experts before taking any investment decisions.