Investing Abroad: A Guide For Indians

Investing in foreign stocks is a great way to diversify your portfolio and take advantage of opportunities in other markets. As an Indian investor, you can invest in foreign stocks through various avenues, including Indian fund houses with foreign tie-ups, exchange-traded funds (ETFs), and international mutual funds.

Before diving into the world of international investing, it's important to be aware of the associated risks, such as currency exchange risk, higher costs, and the potential for inadequate information due to the distance from the market.

Here's an overview of some common methods for Indian residents to invest in foreign stocks:

- Indian Fund Houses with Foreign Tie-ups: Look for Indian fund houses that offer mutual funds with names like Emerging Market or Europe Focus, indicating they invest in foreign stocks. This option allows you to invest in foreign markets without the hassle of currency risks.

- Exchange-Traded Funds (ETFs): ETFs are bought and sold throughout the day, providing more flexibility than mutual funds. You can invest in ETFs on international indices, giving you exposure to a basket of international stocks.

- Direct Investment in International Funds: According to the Reserve Bank of India (RBI), Indian residents can invest up to $250,000 per year in direct foreign investments without any special permissions under the Liberalised Remittance Scheme (LRS). You can open a trading account with an international broker to access these opportunities.

- Mutual Funds with International Exposure: You can invest in mutual funds that focus on international equities, providing a simpler way to gain exposure to global markets without the need for extensive research.

Foreign portfolio investments (FPI)

Foreign portfolio investment (FPI) is a method of investment that allows investors to hold significant assets in a foreign country. FPIs are considered an easy way to invest in a foreign country, along with foreign direct investment (FDI). However, unlike FDI, FPIs are categorised as indirect and hands-off investment techniques, as the investor does not have direct access to, or control over, the assets of the company in which they have invested. FPIs are passive forms of investing, consisting of financial assets such as stocks, bonds, and cash equivalents.

FPIs are important for a country's economy, and developing or evolving countries like India attract a sizeable amount of indirect investments via FPIs each year. India's market is largely untapped and holds enormous potential, with a stable government and a well-rounded bureaucracy.

There are several benefits to FPIs:

• They help companies raise significant capital without incurring massive expenses.
• They provide investors with the opportunity to diversify their portfolios internationally, reducing volatility and increasing chances of profit.
• Investors can gain substantially from exchange rate differences.
• FPIs help investors diversify their portfolios, which boosts their confidence.
• FPIs move towards larger markets with lower competition, an attractive combination for investors.

However, there are also downsides to FPIs:

• Economic turmoil and political instability may negatively impact investments.
• Markets in any country are inherently volatile, and losses may pile up if funds are not withdrawn quickly.

In India, there are three primary categories of FPI:

• Category I (low risk): This includes financial assets backed by the Indian government, such as government bonds, state-owned funds, and sovereign wealth funds.
• Category II (moderate risk): This includes bank deposits, mutual funds, insurance policies, and pension funds.
• Category III (high risk): This covers all FPIs not included in the first two categories, such as charitable trusts and endowments.

To invest in shares of Indian listed companies, foreign investors must use the FPI route and register with the country's markets regulator, the Securities and Exchange Board of India (SEBI). There are no restrictions on investing in Indian companies via this route, but an FPI cannot hold more than 10% in a listed company. All FPI investments must be made in Indian rupees and dealt through brokers.

Overall, FPIs offer a way for investors to access foreign markets, providing the potential for higher returns and allowing them to tap into diverse economic growth opportunities worldwide.

Direct investment in stocks

There are two ways to directly invest in foreign stocks:

• Opening an overseas trading account with a domestic broker: Many Indian brokers have tie-ups with stockbrokers in the US, acting as intermediaries to execute trades. Some examples include ICICI Direct, HDFC Securities, Kotak Securities, and Axis Securities. This option may have restrictions on certain investment vehicles or the number of trades, and it's important to be mindful of the charges involved, including brokerage and currency conversion fees.
• Opening an overseas trading account with a foreign broker: It is also possible to open an account directly with a foreign broker that has a presence in India, such as Charles Schwab, Ameritrade, or Interactive Brokers. Again, be sure to understand all the fees and charges before proceeding.

According to the Reserve Bank of India (RBI), under the Liberalized Remittance Scheme (LRS), Indian residents can invest up to $250,000 per financial year (April to March) in direct foreign investments without any special permissions. This limit applies to the total amount of funds invested across all international investments.

When investing directly in foreign stocks, it is important to consider the additional costs, tax implications, currency conversions, and other factors. International trading accounts tend to be more expensive, with higher margin requirements and brokerage charges. There is also the risk of currency exchange fluctuations affecting profits.

Indirect investment in stocks via mutual funds or ETFs

If you don't want to open an overseas trading account or maintain a minimum deposit, you can gain exposure to foreign stocks by investing indirectly through mutual funds or exchange-traded funds (ETFs).

There are many mutual funds that invest in foreign stocks and/or mutual funds. Mutual funds are actively managed, meaning fund managers make decisions about how to allocate assets, whereas ETFs are usually passively managed, tracking market indexes or specific sector indexes. ETFs can be bought and sold just like stocks, but mutual funds can only be purchased at the end of each trading day.

There are direct and indirect routes available for ETFs. You can purchase foreign ETFs directly via a domestic or international broker, or purchase an Indian ETF of international indices. There are several international ETFs available that allow access to Nasdaq and other leading global indices.

The Reserve Bank of India (RBI) released guidelines under the Liberalized Revenue Scheme (LRS) that permitted an Indian resident to invest up to $250,000 (around 1.9 crore rupees) per year without any special permissions.

Foreign direct investment (FDI)

There are two routes by which India receives FDI: the automatic route and the government route. Under the automatic route, FDI is allowed without the need to obtain any approval or license from the government. The amount of investment permitted depends on the sector in which the investee entity operates. For example, sectors such as manufacturing, telecom, and financial services allow foreign investors to invest up to 100% in an Indian entity.

Certain other sectors fall under the government approval route and require the prior approval of the government, the Reserve Bank of India (RBI), or both. Key sectors that require government approval include the multi-brand retail trading sector, where FDI of up to 51% is permissible assuming certain regulatory conditions are met, and the brownfield pharmaceutical sector, where any FDI above 74% must obtain government approval. Some sectors, such as lottery businesses and the manufacture of tobacco or tobacco substitutes, are prohibited from receiving FDI.

The Indian government has broad discretion in granting or rejecting a proposal. The Department for Promotion of Industry and International Trade (DPIIT) and competent authorities would consider, among other things, the reputation of the foreign investor, their history of owning and operating similar investments, national security, and the overall impact of the proposed investment on the national interest.

The DPIIT's standard operating procedure on FDI applications provides an indicative timeline of eight to twelve weeks from the date of application to the date of approval. However, it is not uncommon for investors to require up to six to nine months for the entire application to be processed, including time spent providing clarifications or supplementary documents.

FDI inflows have steadily increased in India since the economic liberalization of 1991, generating more than ten million jobs. India continues to be an attractive destination for foreign investment, ranking as the world's eighth-largest recipient of FDI in 2023.

Exchange-traded funds (ETFs)

There are two routes to investing in ETFs: direct and indirect. You can purchase US ETFs directly via a domestic or international broker, or you can purchase an Indian ETF of international indices.

Some examples of ETFs available in India include:

• Mirae Asset NYSE FANG+ETF
• Motilal Oswal Nasdaq Q 50 ETF
• UTI Nifty 50 Exchange-Traded Fund
• Motilal Oswal NASDAQ 100 ETF
• ICICI Prudential Nifty50 Value 20 ETF
• Mirae Asset S&P 500 Top 50 ETF
• ICICI Prudential Nifty 100 Low Vol 30 ETF
• ICICI Prudential Nifty Private Banks ETF
• HDFC Nifty PSU Bank ETF
• ICICI Prudential Nifty PSU Bank ETF
• DSP Nifty PSU Bank ETF
• Kotak Nifty PSU Bank ETF
• Nippon India ETF Nifty PSU Bank BeES
• ICICI Prudential Nifty IT ETF
• Nippon India ETF Nifty IT

Frequently asked questions