The economic downturn in India has particularly made those investors vulnerable who don’t have a diversified portfolio and only have domestic stocks in their investment portfolios.
By Abhay Vohra
The COVID-19 outbreak has ravaged the economy like never before, and the impact is being felt by individuals, businesses, and investors who depend on a thriving and bullish market for gains and growth. In the absence of stability in the Indian stock market, which has decreased almost one-fifths in valuation since the beginning of the year, Indian investors are increasingly looking westwards. Mature markets, such as the US, are attracting them at an increasing rate.
Why invest in U.S. Market?
The economic downturn in India has made particularly those investors vulnerable who don’t have a diversified portfolio and only have domestic stocks in their investment portfolios. While the Indian government and the RBI are taking several steps to pump-prime the economy, it looks like it will take a while for the Indian market and the interlinked world economy to bounce back, particularly because of COVID-19 and its lingering impact on the markets and consumer sentiment.
In such a scenario of continuing volatility and persisting economic gloom, Indian investors are realizing the merits of diversifying their investment portfolios and looking towards foreign markets where the rate of stability is comparatively higher than that of India.
One market which is particularly alluring to the Indian investors is the US Market. The reasons for it are fairly obvious, the US market and its stock market indices such as the Dow Jones Industrial Average has consistently outperformed the Indian indices such as the BSE Sensex in terms of reruns and is doing much better in the face of the economic downturn than India. Furthermore, investing in the US markets gives Indians access to global companies and technology sector stocks which have a bright future and offer significant returns such as Amazon, Apple, Facebook, etc.
In addition to the reasons mentioned above, Indians are also incentivised to invest in US stocks because the cumulative return and repatriation of the funds are based on the actual performance of the stock as well as the percentage of appreciation or depreciation of the associated foreign currency.
Simply put, if you invest in US-based stocks, you stand to gain from the foreign exchange fluctuation even if the actual stock price drops and as the rupee has been traditionally and constantly weakening against the dollar, the chances of earning are exponentially higher if Indians invest in the US and internationally. With the stock price appreciation along with the steady dollar appreciation, investing in the US becomes a win-win situation for the Indian investors.
Despite the above scenario, every market in the world has been affected by the pandemic to some extent. So, there is a degree of risk involved even while investing in a company listed on the US stock exchange. However, this is not holding Indians back from carrying out foreign investments but investing abroad and in the US also has its associated challenges.
Navigating through India’s restrictive guidelines
A lot of Indians would love to invest in the very brands that they use and trust such as Facebook, Netflix, Apple and many more. However, as Indian investors have to navigate through a web of domestic regulations for investing in US-based stocks, the average Indian investor/retail investor who is desirous of investing cannot easily invest in the US. The procedure for investing in US stocks can be cumbersome and involves filling up a physical form post which the remittance takes more than a week to reach the overseas trading account.
As per the Liberalised Remittance Scheme, Indians cannot send remittances beyond USD $ 2,50,000 for both current and capital account transactions including making investment abroad in stock markets. The Liberalised Remittance Scheme threshold, limits the scope for making significant investments abroad and the potential for big returns therefrom. Resultantly, Indian investors can only invest small sums abroad and this combined with the high fees behind each remittance makes it impossible for Indians to invest smaller amounts in a trusted company.
Apart from a handful of brokers, Indian financial institutions are not allowed to facilitate foreign investment, and even the ones who are licensed to do so, need to follow the above-mentioned long-winding protocol that dissuades investors from taking this step. Further, as the investors will be investing in a foreign market they have to pay higher conversion and brokerage charges as the brokerage is usually charged in US dollars, which adds to the overall costs of investing in the US.
Moreover, during the pandemic, it is not feasible for investors to fill physical forms and visit bank branches due to the social distancing and quarantine norms. At a time when a lot of Indians would be interested in foreign stock markets, such bottlenecks are causing unnecessary hindrances.
Till now, the market for overseas investment has been quite closed up and inaccessible to the general public either on account of novelty or procedure. But going by the current economic downturn in India, it is time that the government opens up the market and allows more platforms to carry out overseas investing through digital mediums. The fees must also be lowered so that investors can truly reap the benefits of diversifying their investment portfolio beyond India.
The mantra to success in the stock market, has always been diversification and in such uncertain times, it is critical to invest in several or low-correlation assets across domestic and international markets. All eyes, now, are on the government, and the steps that it will take to allow Indians to make the most of US-based stocks and ETFs, and thrive through these trying times.
(The author is Partner – Burgeon Law, a leading boutique law firm)