There could be several reasons for a person deferring his current consumption. While some might want to save for their children’s higher studies or accumulate down-payments for a home or car loan, others might wish to garner retirement funds for the future.
Whatever may be the reason, one needs to measure risk and return, which will help evaluate alternative investments.
Improvements in communications and relaxation of international regulations have made it easier for investors to trade in both domestic and global markets. As an investor, one should seek to acquire a group of investments with different patterns of returns over time. If chosen carefully, such portfolios minimise risk for a given level of return as low or negative rates of return on some investments over a period of time are offset by above-average returns on others.
Why go global
Earlier, a bulk of investments available to individual investors consisted of Indian stocks, bonds and bank term deposits. Now, however, a call to your broking house or logging into your demat account can give you access to a wide range of securities sold throughout the world. One can purchase stocks, treasury bonds or mutual funds that invest in various sectors.
When investors compare the absolute and relative sizes of Indian and foreign markets for stocks and bonds, they find that ignoring foreign markets reduces their choices to less than 50% of investment opportunities. As more opportunities broaden your range of risk-return choices, it makes sense to evaluate foreign securities.
The rates of return on non-Indian securities generally have higher returns. Of course, it depends on the type of instrument and the market. The higher returns can be justified by the higher growth rates for the countries where they are issued. One of the major tenets of investment is that investors should diversify their portfolios. Because the relevant factor when diversifying a portfolio is low correlation between asset returns, diversification with foreign securities having low correlation with Indian securities can help substantially reduce portfolio risk.
An investor will have to open a trading account with a foreign broking house through an Indian brokerage firm to invest in securities of foreign companies listed on the exchanges of their respective countries. As per a recent rbi circular, an Indian citizen can remit a maximum of $75,000 in a fiscal for investments in international capital markets. Once the funds are remitted to a foreign broking house, investor can trade directly with the foreign broker.
Unlike the Indian market, where shares bought are transferred into one's demat account within three days (T+2), in foreign markets, they will be with the trader's pool account and the same will be reflect on the clients trading account immediately after buying. However, margin trading and short selling will not be allowed with a foreign broking house.
Both the dividend earned and capital gains are subject to tax laws of the respective laws of land. But it is adjusted against the tax liability in India if there is a treaty between the two countries. As overseas investments are made in foreign currency, the gain/loss will be subject to the movement of the home and investing currencies.
* The writer is associate professor in finance and accounting,