Why consider investing abroad at all?

It is a well-established fact that investments across asset classes help create large corpus, which helps to achieve your financial goals. Some investors not only invest in varied asset classes but also like to invest in assets located overseas. And they have strong reasons to do so.

Investing abroad

Many Indian investors have taken to investing abroad.

Resident individuals are allowed to remit up to $2.5 lakh per year overseas under the liberalised remittance scheme (LRS). This window is availed of by many to tap investments overseas. As per Reserve Bank of India (RBI) data, outward remittance under LRS for ‘investment in equity and debt’ went up to $746.57 million in 2021-22 from $195.45 million in 2014-15.

For purchase of immovable property over the same period of time, Indians remitted $112.90 million compared to $45.54 million.

The trend of rising remittances speaks of the willingness of resident individuals to acquire assets abroad.

Diversification

Though the uber rich are keen on buying properties overseas as second homes, there are more reasons to invest overseas.

Diversification is a primary reason many Indians want to invest assets abroad. Rahul Jain, President & Head, Personal Wealth, Edelweiss Wealth Management, says, “Every country offers unique investment opportunities arising out of economic growth, macro policies, political environment, innovations, and technological developments. With regulatory changes permitting investment abroad, either directly or through the fund of funds or exchange-traded funds route, investors have access to immense wealth creation opportunities beyond India.”

For example, an Indian investor keen on investing in cutting-edge technology, biotech and alternate assets such as platinum, and water, among others, may want to explore investments overseas.

Even within one asset class, two different geographies need not move together. Ashish Shanker, MD & CEO, Motilal Oswal Private Wealth, points out that there is a 0.25 correlation between US stocks and Indian stocks. “They do not rise and fall together. Spreading your investments can reduce your portfolio risk, especially when you are investing in risky assets,” he says.

Take the case of CY2022 ― the S&P 500 index, a measure of American stocks, is down 14.66 percent, whereas the Nifty 50 Index is up 3.35 percent.

“Diversification aids in reducing portfolio volatility as a booming financial market in one country can make up for the setback in another,” says Jain.

Building a foreign nest abroad

Nurturing overseas financial goals is the second-most important reason why individuals want to invest abroad.

Historically, it has been seen that the rupee has lost value against the American dollar. The value erodes at around 3 percent per year over the long term. “High networth individuals (HNIs) keen to send their children overseas for higher education, prefer to keep some money in investments abroad,” says Shanker.

Also, individuals keen to take foreign vacations tend to hold investments in foreign currencies so that they do not get hit by the depreciation in the rupee against the dollar.

“Many HNIs with large portfolios prefer to invest in stocks and ETFs listed overseas in order to cut risk and seek exposure to high-growth businesses which may not be available in India,” says Suvajit Ray, Head of Products, IIFL Securities.

Easy access for foreign assets

Ease of transacting in overseas assets and boom in technology stocks made many investors contemplate investments abroad.

After the COVID-19 pandemic, many fintech companies rolled out online solutions that facilitated financial investments overseas. The click-of-a-button approach, free of ‘paperwork’, ensured that the costs went down for transacting overseas. This has attracted many investors, especially towards financial assets such as stocks and mutual fund units that let you invest in stocks, bonds, commodities and real estate, among others.

Investors tend to chase past performance. Investments in units of ETFs tracking Nasdaq 100 have been among the best-performing ones over the decade ended CY2021. No wonder, many investors get attracted to investing in shares of technology companies that drove the performance of Nasdaq 100 and various products that were built around Nasdaq 100 and the technology theme.

Foreign residency

Immigration policies of some European nations that require a certain amount of investment, also made some HNIs seeking citizenship or residency status in these foreign nations, make investments abroad.

Retail investors also got drawn into the foreign investment bandwagon. Mutual fund schemes focusing on international stocks managed assets worth Rs 38,014 crore as on August 31, 2022.