Richa, a 32-year-old entrepreneur, is an active investor. She prefers equities due to the potentially high returns that they offer. Richa has been tracking US stock markets and admires some of the companies listed on that stock exchange. She wishes she could invest in those stocks. She approaches a financial advisor to help her do this. Here is what the advisor tells her:
Benefits of investing in foreign markets:
Richa’s advisor first complements her on her insight into investing abroad. He recapitulates four key benefits of investing abroad:
First, you enjoy the benefits of diversification. By investing abroad, you reduce the component of ‘country risk’ in your investment portfolio. In other words, if the Indian economy slows down, which may affect your domestic investments, your investments abroad may appreciate as a result of high economic growth in the foreign country.
Second, you have the advantage of investing in a foreign currency. Similar to ‘country risk’, you are also protected from ‘currency risk’. If the Indian currency loses value against the US dollar, your investment in the US will fetch you more Indian rupees, thus resulting in a gain, and vice versa.
Third, you get the opportunity to invest in companies, sectors and themes that may not be available in India. These might include e-commerce, the digital economy, and retail.
Fourth, the amount invested abroad through a feeder fund does not fall within the limits of capital remittance imposed by the Reserve Bank of India (RBI). RBI has stipulated a maximum of USD 2,500,000 that can be remitted outside India per person per year. In other words, if you want to invest more than this amount in a year, you can do this through a feeder fund without having to restrict your investment to the limit imposed by RBI.
Route to investing abroad
The financial advisor then explains international feeder funds. This is Richa’s route to investing in foreign stocks in an easy and convenient way.
An international feeder fund collects money from local investors for investment abroad. An international feeder fund is a fund-of-funds. That is, it doesn’t invest directly in securities abroad; instead, it invests through its parent fund. The parent fund invests the money in foreign corporations. An international feeder fund can be country-specific, region-specific or theme-based (e.g. consumption, energy, real estate). For instance, a mutual fund can include an international gold fund that is an international feeder fund which garners investments from Indian investors and, in turn, invests its corpus in a global fund that invests in gold mining companies; this global fund is run by the mutual fund’s parent company.
You can invest in an international feeder fund in the same manner as you invest in any mutual fund scheme. You can invest online or offline, directly or through a mutual fund distributor.
These funds are similar to any Indian fund in terms of the funds’ management cost.
While investing in another currency helps you diversify currency risk, you also face the possibility of reduction in your investment value if the Indian rupee strengthens vis-à-vis the currency of the country in which you have invested. Other than currency risk, there is the risk associated with equity investing. By using the systematic investment plan (SIP) route, where you invest a fixed amount every week, month or quarter, you can reduce the risk associated with equity investing.
All international feeder funds are treated as non equity oriented funds for taxation purposes. If you hold your investment for less than three years, the gain is taxed based on the tax rate that applies to your total income. If you hold your investment for more than three years, you pay tax at 20 % plus applicable surcharge and 4% Health and Education cess after considering indexation.
Note: As per Finance Bill 2018, existing 3% Education Cess will be replaced by a 4% Health and Education Cess on the tax plus surcharge.
Monitoring your investments:
As with any investment, it is necessary to monitor your investments in an international feeder fund. This entails keeping track of currency movements and the growth in the market or theme in which you have invested.
Investing in an international feeder fund is suitable provided you are convinced about the growth prospects of the country/sector in which you plan to invest. An additional angle involves the impact of the currency fluctuation on your investment value. At the same time, such funds offer you the benefit of diversification. Invest in such funds after sufficient research or seek the services of a financial advisor.