Are you considering investing in US or other foreign stocks from India? Are you looking for guidance on how to trade in the international market from India? In this discussion, we will explore easy ways to invest in the international stock market.
Any knowledgeable financial professional would advise that diversifying one's portfolio is the only way to reduce market risk. This reasoning is sound because it is highly unlikely that all industries in all sectors within all countries will face detrimental conditions, unless it is the end of the world or a year full of uncertainties like 2020. So, if diversification is the key to sound investing, why limit diversification?
Why should you invest outside of India?
Index funds like US's S&P 500 have yielded a 10-year return of 13.6%, which is a decent amount of return for those new to investing.
Additionally, there are countries known for certain products or industries. For example, the United States is at the forefront of technological innovations, particularly in Silicon Valley. In the global economy of the 21st century, it would be strange if investors could not benefit from such specializations and high-quality products.
If that is not enough incentive, you should know that US indexes are less volatile to fluctuations than Indian markets, despite occasional crises. The reasons for this are beyond the scope of this discussion. However, what is within the scope is how much you can actually invest. Let's delve into that.
How much money can you invest in foreign stocks?
According to the guidelines set by the Reserve Bank of India under the Liberalized Revenue Scheme, individuals can invest up to $250,000 per person per year, which amounts to around Rs.1.7 crore. This can be done without requesting any special permissions. It is worth mentioning that this limit can be extended under certain circumstances.
This means that if there are two or three people in a family, they can collectively invest up to $500,000 or even $750,000, as the limit is per person per year.
How to trade in the international market? How to invest in foreign stocks from India:
If you already have a Demat and Trading Account in India, you can start trading and investing in companies listed on Indian Stock Exchanges, such as NSE and BSE. However, how can you buy shares of foreign companies listed in their respective countries? What avenues are available for trading in international markets in India?
Let's find the answers.
If you are convinced and want to diversify your international portfolio, the good news is that there are numerous avenues available for trading in international markets while in India. Broadly speaking, they can be classified into two types:
1. Direct Investment in Foreign Stocks:
Direct investment means that the money you invest goes directly into foreign assets of different classes, with no intermediary other than the stock broker. The easiest way to start trading internationally from India is to open an Overseas Trading account with a domestic broker in India or a foreign broker.
There are two ways to do direct investments:
Trading in Foreign Markets through a Domestic Broker: This involves trading in foreign markets through domestic stock brokers. Many Indian stock brokers have tie-ups and offer services for trading internationally. However, it is important to note that some Indian stock brokers may have high charges and restrictions on the quantity or number of trades. Make sure you understand all the documents thoroughly before investing. Notable brokers include HDFC Securities Ltd, ICICI Securities, Axis Securities, etc.
Trading in International Markets through a Global Broker: There are stock brokers that operate globally and offer services for different international markets through a single terminal. Many of these brokerage houses also have a presence in India. Notable names include Charles Schwab, Ameritrade, and Interactive Brokers. For more information on international broking firms, you can refer to the Best Stock Brokers in the USA.
2. Indirect Investment in Stocks: Mutual Funds & ETFs:
Indirect investment means that there is an intermediary that selects the funds and stocks to be invested on your behalf, in addition to the stock broker. These can be global mutual funds and exchange-traded funds (ETFs) whose portfolio baskets include assets of all classes from different geographical regions.
The primary advantage of indirect investment is that there is no personal cap on the amount you can invest, unlike direct investment avenues. While the fund itself may have a cap, individuals can invest as much as they want in the fund. Let's briefly discuss these two alternatives:
Mutual Funds: Mutual funds are a simple and easy avenue for indirect investments. In addition to providing a certain level of asset security, mutual funds allow investors to choose growth and dividend plans according to their individual needs. The advantage is that there is no need to open an overseas trading account.
Exchange Traded Funds (ETFs): ETFs primarily operate based on the performance of the exchange. This method requires more research and analysis compared to mutual funds. However, some advocates argue that over time, very few funds actually beat the market, so ETFs may provide a desirable level of security for patient investors.
What should you consider when trading in the international market?
Stock trading is complicated enough as it is, and international trading can be even more complex due to additional forms, paperwork, and charges. If you are a passive investor, you may want to choose indirect methods over direct methods. However, during international trading, there are certain considerations that should be considered, at least to the best of your ability. This includes factors like taxes.
For example, capital gains made through foreign ETFs and mutual funds are taxed similarly to debt-based mutual funds in India. Gains that occur or are deemed to occur during a three-year period are considered short-term gains. Indexation does not apply. While not of paramount importance, considering such factors can help with effective tax planning.
There is also the additional risk of currency exchange rate fluctuations. If the currency of the country in which you have invested substantially declines against other currencies, any gains earned through the asset may be offset by such losses.
Trading in the international market from India:
Many Indians invest in foreign stocks, such as Apple, Google, Tesla, Facebook, and Amazon, which are popular choices for investors worldwide. Therefore, it is natural for individuals to be attracted to these or other international stocks. The reasons for investing may vary, such as a preference for a specific company, diversification, or a desire for better resources and standards in the international market.
Undoubtedly, foreign investment opportunities can be extremely enticing. However, it is crucial to exercise caution because while there is a chance of increased gains, the risk also increases proportionately. Conduct thorough research before considering trading in the international market from India. Feel free to share your thoughts!
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