Investing in foreign stocks? You must be aware of these things

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April 06, 2021 2:08 PM

By investing in foreign stocks, you can participate in some of the global giants such as Microsoft, Apple, Google, Tesla, Amazon as well as conventional businesses.

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There have been challenges with investments due to limited investment opportunities, especially since the time of COVID-19. Industry experts say home-bias has clearly stung investors in India, and since the pandemic, when the domestic markets started struggling, the US markets stayed resilient and were flourishing, which made investors pay serious attention to overseas markets.

Until recently, only HNIs (High Net-Worth Individuals) and some other sophisticated investors were able to invest globally, both due to the associated costs and complexities. Hence, only around 0.1 per cent of India’s financial wealth was diversified globally.

However, now with various platforms offering the option to invest globally, offering hand-holding for portfolio allocation to investors, along with increased awareness in global investing, more and more investors are looking at this space. Now with various such investment platforms, investors can easily open their brokerage account, digitally.

Suresh Surana, Founder, RSM India, says, “Investment in foreign stocks is one of the best ways of if one wants to diversify the portfolio and also to invest in certain high performing foreign stocks. This is one way to participate in some of the global giants such as Microsoft/ Apple/ Google/ Tesla/ Amazon as well as conventional businesses. This results in reducing your country risk and currency risk since at present, most investments resident Indians hold are in India and in Indian rupees.”

However, when investing in foreign stock, there are certain things an investor needs to be wary of;

Country and Currency Selection – When investing in any foreign country, investors need to understand the risks associated with the country where the investee company is based and the stock exchange through which the investment is being made. Surana says, “There are geopolitical risks, macro-economic risks and company-specific sector or governance risk, which needs to be considered.”

Similarly, the currency risk of foreign exchange fluctuation is inevitable. Experts say the foreign exchange fluctuation could add to the profits of the investor as well as may eat into the profits. Thus, it is suggested the overall targeted returns should take into account such foreign exchange fluctuation risk while investing in foreign stock. Surana says, “It is better to invest in currencies such as US$ or Euro unless you have a deep understanding of the particular currency or country.”

Liberalized Remittance Scheme (LRS) under FEMA for investment in foreign stocks by Resident Individuals – Under the Liberalized Remittance Scheme (LRS) of the Reserve Bank of India (RBI), portfolio investment in overseas foreign stocks or bonds is permitted in the case of resident Indians wherein remittance up to US$ 250,000 for every financial year is permitted.

Consideration of Tax Collection at Source (TCS) – Every Indian resident investor making an investment in the foreign stocks under LRS are subjected to Tax Collected at Source (TCS) at 5 per cent if the amount remitted exceeds the threshold of Rs 7 lakhs in a particular financial year. Such TCS would be collected by the authorized dealer bank under the LRS Scheme while making the remittance on the payment exceeding Rs 7 lakhs. Note that, the rate of TCS may be further enhanced to 10 per cent, in case of non-availability of PAN or Aadhar. However, the amount of TCS collected can be claimed by the investor at the time of filing his/her return of income in India.

Transaction Costs – The investor might also have to pay significant transaction costs when investing in foreign stocks. Surana says “The transactions costs charged by the brokers for investment in foreign stocks is comparatively higher as compared to the transaction costs for investment in Indian stocks.”

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