Widespread interest in international investing is a relatively recent phenomenon among the Indian investors. One reason for this is the superlative performance of the U.S. markets over the last few years. To put things into perspective, if we consider the last 5 years (including 2022 YTD), U.S. equity markets have outperformed Indian markets in 4 out of 5 years. The data is based on the performance of Morningstar country indices. This brought out the benefits of diversifying across geographies and consequently there has been a steady increase in the number of Indians investing in international securities.
Investments through international mutual funds.
Many Indian mutual fund houses partnered with international asset managers and launched feeder funds in India which feed into funds chosen from the basket of international funds offered by their partners. Six international funds were launched in 2020 and 23 in 2021, including ETFs and FoFs launched on the same underlying international fund.
A sharp rise in AUM of international funds driven by strong investor flows and solid global market performance Q3 2020 onwards, prompted SEBI, the securities market regulator, to stop mutual funds from making further investments into foreign stocks beginning February 1, 2022, to avoid breach of industry-wide overseas limits. The regulator specified overall mutual fund industry limit for investments into overseas securities is $7 billion. There is a separate limit of $1 billion for funds investing in overseas ETFs. Industry participants initially believed that the limits would be quickly enhanced, but that has not happened.
Instead, SEBI has allowed mutual fund house to accept subscriptions into international funds to the investment limit as on end-of-day February 1, 2022. This headroom has been created due to the sharp correction in equity markets globally and fund redemptions. However, the headroom is limited by the overall industry wide international investment limit of $7 billion. investors may utilise this marginal opening up of international mutual funds.
Apart from this, there is an additional $1 billion limit for funds having international ETFs as their underlying. This limit is still available and therefore investors can invest into funds which have international ETFs as their underlying funds. However, given that there are very few funds in the market presently which invest into ETF's the opportunity here is quite limited.
We covered it in February in Looking for global diversification? Here's how you can still invest and later in May, What Indian investors need to know about global investing right now.
Liberalised Remittance Scheme
The Liberalised Remittance Scheme is a scheme run by the Reserve Bank of India. It allows resident Indians to remit up to $250,000 per person per year to other countries, which can then be used for various expenditures like travel, medical treatment, tuition fees and also for investment into equity/debt, or property. Families can in fact combine the LRS limits of different individuals in the family for larger investments. Guidance on LRS is available on the RBI website. LRS investments are meant for investors who are seeking to make investments in foreign currency denominated assets for subsequent expenses which will be in foreign currencies as well as creation of foreign assets.
There are several ways nowadays to utilise the LRS facility:
- Investments through IFSC entities
India INX Global Access and NSE IFSC are entities already in existence in IFSC in GIFT city Gujrat, which provide a platform for investing abroad. The instrument being traded here is called an “Unsponsored depository receipt” (DRs). Each DR representing a fraction of one share in the company. Holding a certain predefined number of DRs entitles the investor to hold one share in a foreign company. These DRs are however tradeable only on NSE IFSC and the trade is denominated in US dollars. Currently only 50 international stocks are permitted to be traded at NSE IFSC.
All transactions on the exchange are facilitated by brokers just like on the domestic stock exchanges. The settlement cycle is T+3 days. India INX Global Access INXGA empanels multiple international brokers, such as Interactive Brokers that facilitate investing overseas. Its platform provides a free-of-cost single integrated terminal and a mobile application through which you can invest directly in equities and ETFs traded over 135 exchanges across 33 countries in 23 currencies. Read More on Can I trade in U.S. stocks on the new stock exchange?
- DIY solutions offered by foreign or domestic brokers
An Indian investor can invest into international stocks or ETFs (listed instruments) through either a foreign broker or domestic brokers who have a tie-up with a foreign broker. The overall process has been made easy through making most of the process online. The DIY nature of these offerings however is one reason why the average ticket size in these products is relatively lower.
In conclusion
Given the uncertainty around an increase in the industrywide limit of investment into international securities by mutual funds in the near term, especially now when the Indian Rupee is facing immense pressure against the USD, it is advisable to utilize the LRS route for creation of foreign currency assets.
One must however be aware that the initial documentation etc required for LRS investments is more than that required for investments through international mutual fund schemes. One must also consider that the offerings which are DIY require complete reliance of the investor on his own understanding of international markets which is a daunting task. There are a few services however, which provide a portfolio solution to international investing and in our opinion, those are the ones meant for long term investments into international markets.
Also read, How to invest abroad.