Over the past few years, the Indian investor has had to deal with a lot: exposure to products with higher levels of sophistication, increasing volatility in the asset markets, global events and economic risks and a slew of changes to the legislative landscape. In the post-meltdown era (after 2008) particularly, where the majority of the traditional domestic asset classes have not performed up to expectations and thus left the Indian investor searching for choices, the avenue of offshore funds has made its case stronger each passing year.
Offshore investment opportunities include an extensive variety of investment avenues for the Indian investor since it opens up options that were hitherto unavailable, restricted as he was to the domestic markets. For instance, participation in global commodities (energy, precious metals and agricultural), global consumer themes and economies that are lowly correlated with our domestic market would appear excellent diversification tools in the asset basket.
It also helps equity investors diversify/spread risks across countries. For example, Indian investors could look for diversification across oil-rich countries to hedge their risks. However, offshore investing entails a lot of informed decision making and a thorough understanding of the product/asset class or market the investor is taking an entry into.
Investments via pooling vehicles: Over the past few years the Indian mutual fund industry has offered a bouquet of investment options tapping into different geographies, asset classes and strategies. Specifically in the offshore space, for instance, various asset management companies have offered geography-specific fund such as a Greater China fund or emerging markets fund. In addition, there have been funds that helped diversify across asset classes with funds that invest into precious metals and mining or energy specific (oil and gas, power, coal) and agriculture funds.
Direct exposure to markets: With the loosening of capital controls in the recent past, the Indian investor can now invest directly into shares or derivative instruments of overseas companies via platforms in India (Indian brokers) or by opening an overseas broker account. Direct exposure to the asset of overseas market would require high knowledge of the local conditions.
Real assets overseas: Here the investor can participate by investing in owning a real asset such as real estate, art, etc, and subject to certain conditions. Investing in real assets can be good if the investor has a long-term horizon of the holding, uses it for consumption or is willing to accept lower liquidity.
Hedge/quant funds: Investors now also have access to innovative products streams from global asset managers. For instance, funds that use an all-quant strategy to invest in global stocks or derivative instruments or funds that use long-short strategies across asset markets and geographies have also been marketed in India over the past few years.
While overseas investing has grown manifold over the past few years, one should consider the following points before investing: Individuals face the risk of limited information flow and the conditions in overseas markets can be dramatically different to those prevailing in the domestic markets, often with little or no correlation with domestic macroeconomic events.
An individual can invest only up to $200,000 on a combined basis in a year. Taxation of funds invested in the offshore markets depends on the investment vehicle. Since these funds are not listed in India, the preferential equity taxation rate is not available to investors. In most cases, capital gains would be taxed at 20% after indexation for inflation for long-term assets (over one year for financial assets and three years for real assets). Short-term gains are added to income.
Currency risk needs to be considered. Some funds allow hedging in gold to address this risk. If you have not looked at offshore funds thus far, it is a good idea to evaluate this new dimension for diversification of portfolio.
The writer is chief executive officer of Right Horizons