The basic investment thumb rule — ‘Do not put all your eggs in one basket’ — may seem obvious and trite for many investors. But not all adhere to the rules of diversification in all spheres. Most of us may have diversified our investments across asset classes — equities, bonds, gold, etc.
However, diversification based on geography could be a miss for many.
The US market is one such geography that investors can consider taking exposure to.
Geographical diversification can help shield your returns from the volatility of investing in a single market.
That apart, you can also invest in several unique listed opportunities that are currently not available in India — examples are technology-based companies such as Alphabet (Google), Facebook, Apple, Amazon and Netflix.
The SEC — the apex body for securities in the US — also permits investors (including Indian investors) to invest in fractional shares. If you wish to buy a stock that is too expensive, you can just buy a small fraction of the stock or the dollar value of a stock. Such investors also get to enjoy the voting rights and dividends on such shares on a proportionate basis.
If you wish to plan for your child’s education in the US, investing there can be a good idea to accumulate funds.
Same is the case for any foreseeable expenditure in foreign currency, say, foreign travel.
Investment procedure
Like in domestic choices, for global investments, too, investors can either invest directly in equities or opt for the mutual fund route. For those of you who wish to invest directly, you can do so through investment firms such as Vested Finance, Stockal and Winvesta that provide a global investment platform.
A few Indian brokerages such as ICICI Direct, Axis Securities and Motilal Oswal Financial Services also facilitate such overseas investments through their tie-ups with US brokers.
For instance, ICICI Direct and Axis Securities have tied up with Interactive Brokers LLC and Vested Finance, respectively, to offer a global investment platform.
To open an overseas trading account, you must submit the account-opening form to your broker along with KYC documents, including, PAN, identity proof and residential proof. Most brokerages such as ICICI Direct and Vested Financesupport online on-boarding of customers. The account-opening charges, brokerages and commissions charged vary with each broker.
For instance, ICICI Direct does not charge any account-opening fee for their global investing platform. However, other charges such as annual subscription fee (ranging from ₹999 to ₹9,999) and brokerage (ranging from one US cent per share to $2.99 per order) shall apply. These charges vary according to the plan opted for. Customers of ICICI Direct can chose from two plans — Global Starter and Global Advantage.
Vested Finance, on the other hand, charges an account-opening fee of ₹399 (for customers opting for their Basic Plan), while no further commissions or brokerages would be charged. Even the account-opening fee is waived for customers opting for the Premium plan that comes with various value-added services such as a model portfolio.
Fund transfers
Customers can transfer funds to their overseas trading account through the RBI’s Liberalised Remittance Scheme (LRS) to invest overseas.
Indian investors can remit up to $250,000 in every financial year for all capital and current account transactions under the LRS.
Thanks to their bank tie-ups, most brokers support online fund transfers via the LRS route. Also, most brokers don’t mandate maintenance of minimum balance.
Investors should also note that, starting October 1, 2020, banks will have to collect tax collected at source (TCS) at the rate of 5 per cent, if the amount remitted (including fund transfers for your investments abroad) in any financial year exceeds ₹7 lakh.
TCS will only be levied on the amount remitted above ₹7 lakh.
Those of you who wish to time the market should also take into the consideration the processing time of such overseas transfers (with your bank), along with the settlement cycle of the global markets. Unlike the Indian markets (T+2), the settlement cycle in the US is T+3 (trade plus three days).
Caveats
Currently, Indian investors can only invest in the securities listed on the US exchanges — equities, listed bonds and ETFs (exchange-traded funds).
However, the US exchanges permit cross-listing of securities, that is securities of other countries can also be traded on the US exchanges.
At present, about 465 non-US companies have their shares cross-listed on the US exchanges — such as Bayer (Germany) and Nestle (Switzlerland).
The initial public offerings (IPOs) in the US are not supported for Indian residents.
The RBI also prohibits margin trading or any leverage of any sort in the global markets for Indian residents.
That apart, a few brokerages have extra entry restrictions. For instance, ICICI Direct needs customers to have a minimum net worth (liquid assets) of more than $5,000 to qualify opening an ICICI Direct Global account. Other players such as Vested Finance and Winvesta do not have such entry restrictions.
Investing abroad, however, entails higher risks and may not be for everyone. Investors should keep in mind the information asymmetry and the currency risks before making such investments. Taxation aspects, too, can dent return on investment.
For instance, there is a withholding tax of 25 per cent on dividends earned on US equities. Taxpayers can, however, claim the tax credit on such tax, by filing Form 67 (Statement of income from a country or specified territory outside India and Foreign Tax Credit). Taxpayers are also required to disclose their holdings in their ITR in the Schedule of Foreign Assets.