By Vinay Jaising, MD, Portfolio Management Services, JM Financial Services
The two big reasons behind Indians investing in Global Investments are diversification and hedging a part of their Rupee wealth with dollars. Diversification of the portfolio by adding a global asset reduces risk and enables one to gain global exposure, both should lead to a superior return adjusted for risk.
History has shown that over the last 20 years, the Indian currency has depreciated 3% against the Dollar and the depreciation in the last 5 years is even higher at 5% CAGR. Thus if one had to buy the SPX Index in Rupee terms the return would have been higher in a 5-year, 10 year, and 15 years tenure by a CAGR of 1%, 2%, and 4% respectively. This means if one had put Rs 1000, 15 years in the Indian markets one would have got back over 3 fold – Rs 3160 as against the rupee return investing in SPX Index would have been an impressive 5 fold of Rs 5006.
There are two simple ways to play the global markets for an Indian investor. The first is using the RBI’s Liberalised Remittance Scheme (LRS). Under the Liberalised Remittance Scheme, Indian residents may freely allow up to USD 2,50,000 per Financial Year (April-March) for any permitted current or capital account transaction or a combination of both.
The LRS limit has been revised in stages consistently and now stands at US$ 250,000. There is however a 5% Tax Collection at Source (TCS) charged to the investor over RS 700,000/ which can be adjusted while filing taxes. Also, India and US have a double taxation Avoidance Agreement (DTAA), thus dividend tax is paid only once and not twice.
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Ways to invest abroad
These can then be invested into international market ETFs, stocks, and actively managed funds. One can choose to invest directly in Stocks as well which are prebuilt thematic portfolios. Stacks provides a good foundation to commence investing most coherent to your interest, especially if one is new to global markets.
The advantages of stacks are a) it provides one to gain limited exposure to large-cap companies globally existing by investing a limited amount or fraction of the value; b) They can also enable investors to buy stocks or bonds which have operations in India but are listed globally to gain from that currency appreciation or at least from diversification reduce risk of the domestic portfolio.
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The second way to invest globally is through International Mutual Funds which work in the same way as any other Equity Mutual Fund. The investment is made in rupees, and investors are given units of the investments in return. The money is invested in equities of companies listed outside India based on the decision of the fund manager of the respective fund.
(Author is MD, Portfolio Management Services, JM Financial Services)