CHENNAI: Indian retail investors have rapidly come of age over the past decade and the new crop of market participants are no longer satisfied with staying confined to the limited opportunities offered by Indian stock markets. Over the past year, in particular, market executives say the number of retail participants has exploded and so has their interest in overseas securities.
The increased demand for access to international securities has also resulted in the proliferation of mutual funds focused on overseas investments. And quite recently, both Indian stock exchanges—BSE and NSE—have announced that they would each enable an international trading platform to let Indian investors pick up stakes in US-based stocks.
But, why is this trend of geographical portfolio diversification gathering pace? And how can one invest in overseas securities? Here’s what multiple portfolio and wealth management experts who spoke to TNIE have to say:
The primary driving force behind increased overseas participation is diversification. Because, at its core, a more diverse portfolio of investments offers both wider opportunities for gains and some protection in case one or more investments begin doing poorly. For instance, while average annual returns from Indian equity markets have moderated to single digits over the past five years, some markets such as Taiwan and the US have offered nearly 18-20% annualised gains during the same period.
“Allocating some of your portfolio for overseas securities acts as a hedge,” pointed out Pratik Oswal, Head of Passive Funds, Asset Management Company at Motilal Oswal Financial Services. According to Ashish Ranawade, Head of Products, Emkay Wealth Management, investing abroad has many advantages. “First is the ability to invest in companies which cater to a large market globally. This means the investments are into very large-cap market companies with huge opportunities... And to that extent, the investments can be considered as less risky,” he said.
“These are opportunities which may not be available in the Indian Markets. For eg. Material Sciences, Space Technologies, AI and ML opportunities. Certain markets may be more mature than India for certain types of products. The ability to invest in such kinds of companies (like Walt Disney in entertainment, or Estee Lauder and LVMH in Luxury goods, or Tesla for Electric Vehicles),” Ranawade added.
India has several overseas-focused mutual funds that have exclusive, or partial exposure to international securities. These include the Edelweiss Greater China Equity Off-Shore Fund, Motilal Oswal Nasdaq 100 ETF, Franklin India Feeder - Franklin U.S. Opportunities Fund, PGIM India Global Opportunities Fund, etc.
According to Aashish P Somaiyaa, Chief Executive Officer, White Oak Capital Management, apart from the standard risks associated with investing in equity, there aren’t major cons that should stop investors from venturing abroad. Another major factor to consider is the effect of currency movements on overseas investments. For instance, the depreciating trend of the Indian rupee against the dollar before the onset of the pandemic made returns from dollar-denominated securities that much more attractive. “Till now, INR depreciation added another 4-5% annually to the overseas returns. How it will perform going forward will always be an uncertainty,” Ranawade said.
But how does one make such overseas investments? Experts say there are two broad avenues: first, the do-it-yourself (DIY) method, where one sets up a foreign currency bank and brokerage accounts under the RBI’s liberal remittance scheme (LRS) and directly buys foreign securities. The other is to go through mutual fund schemes that either buy overseas stocks directly or act as feeders for international funds.
For new investors and those with a smaller investment corpus, the expert consensus is to take the mutual fund route. “Some large overseas stocks can be quite expensive… Amazon Inc is valued at $3,200 a share (Rs 2.4 lakh),” said Oswal, noting that MFs can help defray this cost barrier.
According to Somaiyaa, apart from the advantage of getting professional assistance while going through MFs there are two other reasons for doing so. “First is that, across mutual funds, the variety and choice of international funds, geographies, and asset classes is quite large. Secondly, if one goes via opening LRS accounts there is a 5% tax collected at source on remittance. This can be claimed back while filing IT returns but it is a source of friction and inefficiency while investing.”