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Stuck with blocked MF route to global stocks? NSE, BSE offer alternative way

While the NSE offers the GIFT City route to invest in 50 shares, the BSE-backed India INX platform offers 131 stock exchanges, globally.

June 25, 2022 / 02:16 PM IST

If you think there are few or no options to invest internationally through mutual funds, you are wrong. There is actually an alternative for you invest in globally-listed companies, other mutual funds and even exchange-traded funds (ETFs).

That route goes through India’s GIFT City in Ahmedabad, Gujarat, also billed as India’s first International Financial Services Centre (IFSC). Close on the heels of the National Stock Exchange’s (NSE) IIFC platform launched in March that started by offering eight US companies  comes India International Exchange or India INX. This is a BSE-backed platform that offers an opportunity to invest in stocks listed on 131 exchange around the world.

Gift City: Gateway to global investing

India INX has tied up with Interactive Brokers, an American multinational broking company. Orders placed by clients are routed to the respective markets through Interactive Brokers and the trade takes place in those markets. Investors can invest in shares, units of mutual funds and ETFs. They can even buy fractions of stocks listed overseas.

“Investors can pick stocks of companies operating in innovative businesses in overseas markets and managed products such as ETFs, and mutual funds can effectively offer exposure to emerging themes globally. Investors can, thus, over a period of time build a well-diversified portfolio within the limit prescribed by the liberalised remittance scheme (LRS),” said Suvajit Ray, head, products, IIFL Securities.

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An alternative is NSE IFSC (NSE International Exchange), which allows trading in unsecured depository receipts (UDRs) issued against 50 select shares listed in the US. Market-makers in the US hold the stocks and UDRs are issued against them in a predetermined ratio. For example, given the ratio of 10 for Amazon stock, the UDR issued on the Amazon stock will quote near one-tenth the price of the Amazon stock on the US bourses. This makes these stocks accessible, just like fractional buying does.

How to trade

Resident and non-resident Indians can open an account with India INX directly or through a broker empanelled with India INX. This opening can be done digitally by completing the KYC or know your client requirements. This account is different from a trading and depository account opened for trading on Indian exchanges. The investor funds his broking account by remitting money.

Investors can place orders the way they do to buy an Indian stock using a digital interface. The trades are settled as per the local regulations of the markets in which you trade. The stocks are held in the name of the broker when you trade on India INX.

UDRs bought on NSE IFSC are held with custodians in GIFT City. Trades for UDRs are settled on T+3 basis.

Are there any restrictions?

Under LRS, a resident Indian can send up to $250,000 overseas in a financial year. Such individuals are not allowed to trade intraday, invest in products with leverage, trade derivatives or short sell. They can only conduct delivery-based transactions.

When you are trading in a developed market in a frontline stock through India INX, liquidity is not a problem. You also have a wide choice of stocks, ETFs and other units of mutual funds. However, while trading in UDRs on NSE IFSC, you have limited choice and you also have to be mindful of the liquidity.

What are the costs?

There are two direct costs incurred by customers—brokerage fees and the cost of remittances. The brokerage can be a flat charge per order, say, $1 per order, or a miniscule percentage of the order size, subject to a maximum value. Cost of remittance varies from bank to bank. India INX has tied up with a set of banks and is in the process of empanelling more for offering remittance at lower charges.

While trading in UDRs, there can be implicit costs such as the market-maker’s spread and the cost of creation and extinguishment of the UDR, which will ultimately reflect in the prices at which transactions take place.

Should you trade?

Trading on NSE IFSC takes place at GIFT City, and while India INX is also at GIFT City, your orders are placed overseas.

The India INX model is akin to trading through web-based applications backed by Winvesta, Stockal or Globalise, but within the regulatory ambit crafted by IFSC Authority.

V. Balasubramaniam, managing director and CEO, India INX, said, “India INX is the only regulated platform in India which provides access to over 130 exchanges across 31 countries. The exchange enables cost-efficient trading and offers a wide choice of investment options overseas on a robust trading platform. Through our partnership with Interactive Brokers, investors are able to get ample amounts of information about the underlying stock and make an informed decision. So far, we have 2,500 active clients trading on our platform.”

Investing overseas and owning shares of global behemoths may give a high to an investor. However, they also need to answer a few questions. The first is how familiar they are with the global investing landscape. Even if they get a few ideas right, how many can build a diversified portfolio that can deliver consistent returns?

“Investors should not be buying shares just because of their familiarity with the underlying names of global brands. It can be a meaningful diversification overseas if and only if you can pick and choose fundamentally strong stocks,” said Vinayak Savanur, founder and CIO at Sukhanidhi Investment Advisors.

“While investors may find it difficult to pick the right stocks for building a diversified portfolio, they may further find it difficult to keep adding to them in a disciplined manner. It is better to stagger the investments in risky assets the way investors do in mutual funds through systematic investment plans and systematic transfer plans,” said Amol Joshi, founder of Mumbai-based Plan Rupee Investment Managers. Investments in ETFs tracking rule-based indices can be a relatively better option for discerning investors, he added.

Investors have to also comply with all regulations while carrying out these transactions. When you hold assets overseas, you are supposed to disclose the same in the income tax return and account for income and gains overseas.

For an average retail investor, it is better to take the mutual fund route feeding into broad-based index funds, given the convenience they offer.
Nikhil Walavalkar
first published: Jun 24, 2022 09:52 am
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