India is a part of an ever-increasing global community. We are continually engaging with a variety of international brands, from Netflix to Apple, and Uber to Spotify to fulfil our needs and desires.
We are travelling more than ever before be it overseas for business, education or leisure. Our costs and liabilities are becoming increasingly global.
One attribute that distinctly stands out is that our investment portfolios are predominantly domestic. The term in investing most frequently used to describe this phenomenon is home bias.
It is common for investors to have a domestic bias. However, it creates significant challenges as portfolios are very sub-optimal to our goals and needs.
A global portfolio allows you to be part of the global growth stories that are otherwise inaccessible.
Here are five key things to know about global investments:
It is perfectly legal to invest overseas
The RBI instituted the Liberalised Remittance Scheme (LRS) in 2004 to allow Indian residents to spend and invest overseas. It now stands at $250,000 per person each financial year.
When you pay for international university fees, you use this scheme. When you pay an overseas tour operator, you use this scheme. A family of four can invest and spend up to a million dollars overseas each year. The scheme has no age barrier.
A geographically diversified portfolio is less volatile than a concentrated one. Equity markets in developed countries tend to be less volatile than those in emerging markets over the long-term.
Investing in US markets is a great way to diversify the portfolio. Many global companies in other geographies also have a US listing. Thus, by investing in Alibaba’s US listing, you can take part in the Chinese economic growth.
One can also access multiple countries through ETFs. For example, you can invest in the German Equity Index - DAX 30 - through the US listing of a DAX tracking ETF.
One can also access themes that are unavailable domestically. There are no large electric mobility or chip manufacturers you can purchase shares of in India. But you could access the themes through investing in shares of companies such as Tesla for electric mobility or Nvidia for semiconductor chips.
After opening your overseas brokerage account, you will need to fund it by remitting money from your bank account. Investors need to be wary of currency conversion costs, depreciation and interest rates.
Banks charge for converting the INR to USD, and these can be as little as Rs 100 with an FX spread of 0.2 percent or as high as Rs 2,000 + a spread of 2.00 percent, based on your bank.
However, by investing overseas, one is exposed to currency appreciation (or depreciation). For example, the USD has been appreciating on average between 3-5 percent versus the INR over the last few years.
Over the last year, the depreciation is approx. 10 percent. Emerging markets' currencies depreciate over the longer-term. Interest rates in savings accounts are at a low 3-4 percent on an average.
However, by investing in currencies of the G-7 markets globally, the investment portfolios have generally had the double benefit of rallying markets and appreciating currencies.
It is important to consider any life goals that you are working towards. Looking to study or migrate overseas? If so, you’d want to ensure that the investments are commensurate with achieving those specific portfolio values that you can use to pay for your university expenses or for immigration.
If you want to save up $50,000 to pay for your child's university fees, then you must plan to invest in line with those expectations.
This may need to be separate from the diversification goals of your portfolio composition
You need to keep in mind the income tax implications on the returns and investments you make in the international market. For instance, there is no tax on capital gains in the US market for non-residents and a flat 25 percent tax on dividend payouts.
On the other hand, according to Indian tax laws, Indian residents have to declare all the immovable assets and bank accounts in foreign countries in their IT returns, irrespective of any capital gains earned. You need to pay tax in India on any income, including rental income and capital gains.
(Swastik Nigam, is Founder and CEO, Winvesta)Disclaimer: The views and investment tips expressed by experts on Moneycontrol.com are their own and not those of the website or its management. Moneycontrol.com advises users to check with certified experts before taking any investment decisions.