The direct way to invest in global stocks

It has been a month since mutual funds, providing access to global equity strategies, have stopped accepting new money since they had reached the RBI-defined limit of $7 billion for the mutual fund industry. Until this limit is modified this avenue for investments remains closed.

The ETFs tracking global indices are still trading on the Indian exchanges and can be bought and sold. However, they cannot grow their AUM. It is merely a transfer of ownership interest from one individual to another. There can be no net inflow into the ETFs.

Also read | How restricting fresh lumpsums in international mutual funds impacts investors

Getting started

This brings to the fore the direct way to invest in the global markets. While US-based Interactive Brokers has been around for several years, in the last few years several investment platforms like Stockal and Vested operating via US-broker DriveWealth have also emerged.

In the last few months, the BSE’s international exchange, India INX, and NSE International Exchange, both operating in GIFT city, have started offering global stocks.

On most of these platforms, the documentation and due diligence is done via an online process and, typically, takes a couple of days. Once the account is opened, the investor has to transfer funds to the broker for crediting to their accounts under the RBI’s LRS (Liberalised Remittance Scheme). LRS allows each resident individual, including minors, to freely remit US$ 2,50,000 per financial year (April-March). Remitted money can be used for investment purpose in equities. This means that every financial year a family of four can transfer up to US$ 1 million. This is a significant limit.

While the above process to open a broking and custody account and remit the money is quite easy, one has to be cautious when deciding what to invest in.

Domestic versus global market: who wins?

The recent depreciation in the INR versus the USD has once again emphasized the value of having global diversification and some equity investments in USD-based assets in the portfolio. Such a portfolio is less volatile while still having similar returns in the long-term.

Contrary to popular belief that the long-term returns of Nifty 50/Sensex are higher than S&P 500, the actual returns from both are similar. The error that most people make while making the comparison is to compare the Nifty 50 returns in INR with S&P 500 returns in USD. When both are compared in the same currency, say INR, the returns are similar. In fact, in many periods the S&P 500 delivers much higher returns compared to Nifty or Sensex. In short, the market is less correlated.

Which international stocks to invest in?

Many investors would like to, and do, invest in popular stocks, both from the new world, such as, Google, Tesla, Facebook etc. and the old world, such as, Coca Cola, McDonald’s, etc. or the one which is a mix of both the worlds, Warren Buffett’s Berkshire, which has investments in both Coca Cola and Apple.

Or, one could invest in ETFs which track the S&P 500 or Nasdaq 100. While an index-tracking ETF beats most mutual funds, it guarantees mediocre results—which, by the way, is not bad at all, especially in INR terms, as discussed above.

We would caution against investing directly into individual stocks. Typically, most investors have no or limited understanding of the business models of most companies; meaning, how they generate revenues and profits and the factors which impact these. This makes buying individual stocks quite risky.

ETFs, mutual funds, direct stocks: the best route to go abroad

An investor has several options, viz., buy individual stocks, but they are risky; buy mutual funds, but, typically, they underperform ETFs; or buy ETFs, but they guarantee only market returns.

Also read | What does the re-opening of Parag Parikh Flexi Cap, a MC30 fund, means for investors?

Besides these options, there is one more way possible now. One could in professionally managed portfolios, such as, stacks on the Stockal platform. These portfolios of stocks provide much more diversification as compared to an individual stock, while still allowing one to invest in interesting and innovative growth vectors which are transforming the global economy.

If one chooses growth vectors which are not available easily in the Indian markets, another dimension of diversification is added to the portfolio, thus making it several notches superior to a conventional India-only portfolio in terms of safety on the downside and opportunities on the upside.

It is seen that, typically, a portfolio with exposure to US markets would be much less volatile, especially during volatile times. For example, during the Covid downturn, such a portfolio would have been more stable compared to a portfolio of only Indian equities.

Of course, the decision to invest should be based on an individual’s financial situation, risk profile and investment objectives in consultation with their financial planner or advisor.