Investing in foreign stocks enables Indian investors to invest in some of the most valuable and globally renowned companies from technology businesses such as Microsoft, Apple, Google, Tesla, Amazon, Alibaba and Netflix to conventional businesses such as Samsung, SaudiAramco, Visa, LVMH and Tencent Holdings.
Investing in foreign stocks from India is permissible and reasonable allocation can be made towards such stocks to diversify your portfolio. Under the Liberalized Remittance Scheme (LRS) of the Reserve Bank of India (RBI), resident Indians are permitted to remit up to $250,000 per financial year for portfolio investments and other permissible transactions.
Moreover, the availability of extensive information and high governance standards of these companies and the stock exchanges provide better understanding of the investments made by you.
If you are looking to invest in globally listed stocks, here’s how you can go about it.
Modes of Investment
Investment via Liberalized Remittance Scheme (LRS) Limit
Investments outside India are governed by the foreign exchange regulations in India and rules made thereunder. Portfolio Investment in overseas foreign stocks or bonds is permitted in case of resident Indians under the LRS of the RBI, wherein resident Indians are permitted to remit up to $250,000 per financial year for any permitted current or capital account transaction or a combination of both. Investment in Gift City International Financial Services Centre (IFSC) would also be covered under the purview of LRS.
Further, LRS is only applicable to an Indian resident. It does not apply to a non-resident Indian (NRI) and thus, NRIs are not bound by the limit to invest $250,000 per financial year only. They can invest without limit out of their overseas assets and can also remit $1 million per financial year from India.
An investor can use any or all of the following modes for the purpose of making investment in foreign stocks:
An investor can directly invest in foreign stocks either by opening an overseas trading account with an Indian broker (such as Axis Securities, HDFC Securities, ICICI Direct, among others) which is in partnership with a foreign broker; or by directly approaching a foreign broker (such as TD Ameritrade, Charles Schwab International Account, Interactive Brokers, etc.) and open an overseas trading account with them.
However, certain foreign brokers may require the investors to maintain a minimum deposit which may add to their capital requirements.
Investment in Foreign Stocks listed on GIFT City IFSC:
NSE International Exchange (also called as NSE IFSC), a wholly-owned subsidiary of NSE Ltd. and The India International Exchange (IFSC) Limited (also called as India INX), an arm of BSE, are the two major international exchanges, based in the IFSC at Gujarat International Finance Tec-City (GIFT City). These stock exchanges provide an international trading platform for the Indian investors to invest in the international stocks.
An investor can also route his investments in the foreign market via mutual funds. He can either choose between an international fund or an Indian fund which invests in foreign stocks. Index funds which have investments in foreign indices such as S&P 500, NASDAQ 100, Dow Jones, Russell, etc. can also be used as an indirect tool to make investments in the foreign stocks.
Investors who lack strong understanding and knowledge of the stock markets but want to diversify their portfolio may evaluate and opt for this mode of investing in foreign stocks.
Many fintech startups have launched mobile applications, which simplify the investment procedure and assist Indian investors to invest in stocks listed in the foreign stocks.
Factors to be Considered Before Investment in Foreign Stocks
Before investing in a foreign stock, an investor needs to be wary and should evaluate the following things in general apart from the in-depth analysis of the investee company:
When investing in any foreign country, one needs to understand and analyze the risks associated with the investment location/ country. Considerations such as geo-political risks, macro-economic factors and investee entity specific, future business prospects, etc., sector needs to be taken into account. For instance, investment in the stock market in a country which has potential for war or conflict with India should be avoided.
Foreign Exchange Fluctuation Risk
Similarly, the currency risk of foreign exchange fluctuation cannot be ignored. Foreign exchange fluctuation refers to the volatility of the foreign exchange currency (say U.S. dollar or British pound) in comparison with the Indian currency which may either cause profit or loss to the investor and accordingly the target returns should consider any foreign exchange fluctuation risk.
For instance, in case it is expected that the U.S. dollar will strengthen against the Indian rupee, you will have higher return in rupee terms and vice versa.
Swings in the prices of the stocks, in either direction, can be said to be the volatility risk. In layman terms, volatility is the risk related to the quantum of changes in the value of a stock. Higher the volatility, riskier is the stock, as price of the same becomes unpredictable. Generally, stronger developed markets which are less volatile are better from an investment perspective.
Adverse change in the macro economic factors of an economy is referred to as economic risk. Unemployment, interest rate fluctuations, political instability, undesirable changes in laws, etc. are few factors that can severely impact the operations of an organization in that economy, thus affecting their share prices. Hence, before investing in any foreign stock, an investor should evaluate all the macro economic factors of the country of investment.
Costs Related to Investment in Foreign Stocks
It is pertinent to note that the transaction cost for the purpose of investing in foreign stocks would usually be higher vis-à-vis Indian stocks. One hidden transaction cost is the difference between the buying and selling rate of the foreign currency (say U.S. dollar).
It is advisable to also open a bank account in the same currency in which you are investing to avoid frequent conversion of foreign exchange.
The other important components are:
- Margin money requirements
- Bank charges
- Depository charges
- Applicable goods and service tax/VAT/STT, if any.
- On an average and assuming a reasonable portfolio, the transaction cost can be indicatively in the range of 0.5% to 2%.
Consideration of Tax Collection at Source (TCS)
In accordance with Section 206C (1G) of the Income Tax Act, 1961 (“IT Act”), tax collected at source (TCS) at the rate of 5% would be levied and collected by the authorized dealer bank in case of an Indian investor making an investment in the foreign stocks under LRS provided the remittance exceeds the prescribed threshold limit of INR 7 lakh in a particular financial year.
Such TCS would be on the payment exceeding INR 7 lakh. The rate of TCS may be further enhanced to 10%, in case of non-availability of a PAN Card or an Aadhar Card. However, the amount of TCS collected can be claimed by the investor as tax credit at the time of filing their return of income in India. As a result, it is not a tax on the transaction but tax for which credit can be claimed against the other income in India or can be claimed as refund, as the case may be.
While investing in foreign stocks is a good opportunity to diversify the investment portfolio, it should be made only by following informed decision-making processes. Last but not the least, investors should evaluate their investment horizon, risk-return preferences, financial goals and level of risk tolerance before investing in international stocks. Investors must ensure compliance with the exchange control regulations, reporting of foreign assets and income as well as ensure compliance in the country of investment.