How to Invest Outside India

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How to Invest Outside India

India's economy is not just growing; it's soaring! Achieving a significant growth contribution of about 7.51% to the world's GDP, as noted by Barclay's analysts, India stands strong with relatively low inflation. However, even with this robust expansion, India still represents only a small segment of the wider global economy.

The remaining 92.49% of the global economy holds untapped potential for Indian investors. By extending their investment horizons beyond domestic markets, investors can access a world of opportunities. This includes participation in industries, technologies, and markets that are not present in India, offering a chance to diversify portfolios and potentially enhance returns.

This guide will explore how Indian investors can effectively tap into international markets. We'll discuss various investment avenues like foreign stocks, international mutual funds, and more, providing clear and actionable insights. The goal is to provide you with a comprehensive understanding of global investment opportunities and how to access them, making it easier for you to participate in the global financial landscape.

Understanding the Global Opportunity - Mechanism of Investing Globally

For Indian investors, stepping into the world of global investments is not just about diversification but also about tapping into new growth avenues. But what does "investing globally" even mean and how does one do it effectively?

  1. Research and Understanding Global Markets: Before venturing into international investments, a thorough understanding of the target country's market is essential. This includes analyzing economic stability, market performance, and political climate. For example, investing in the US stock market demands familiarity with its market dynamics and regulatory environment.
  2. Diverse Investment Options: Global investing isn't limited to just purchasing foreign stocks. It encompasses a variety of investment vehicles such as global mutual funds, which pool money to invest in a diversified portfolio of international securities, and exchange-traded funds (ETFs) that track global indices. Each option carries its own risk and return profile.
  3. Compliance and Regulation: Understanding the regulatory framework of the target country is crucial. This includes knowing the limits on foreign investments, tax implications both in the host country and India, and adhering to reporting requirements set by authorities like the Securities and Exchange Board of India (SEBI).

Leveraging the Liberalized Remittance Scheme for Global Investments

The Reserve Bank of India introduced the Liberalized Remittance Scheme (LRS) for Indian investors aiming to explore global markets. LRS serves as a gateway for investing abroad by simplifying the process of sending money outside India.

Utilizing LRS to Invest Outside India

  1. Annual Remittance Cap: The LRS allows Indian residents to remit up to USD 250,000 per financial year for a broad range of purposes, including investing in foreign stocks, real estate, and other assets. This cap is periodically reviewed and adjusted by RBI to align with macroeconomic conditions.
  2. Flexibility in Investments: Under LRS, individuals are free to invest in overseas markets, whether it's equities, debt instruments, or purchasing properties. It's a flexible scheme that caters to diverse investment objectives, from education and travel to medical treatment and maintenance of close relatives.
  3. Tax Compliance and Reporting: Using LRS for investments requires adherence to tax laws in India. This includes declaring foreign assets and incomes in tax returns and understanding the implications of Double Taxation Avoidance Agreements (DTAA) if applicable. Moreover, individuals must ensure that their remittances don't breach the prescribed limits and are used for permissible purposes only.
  4. LRS and Foreign Exchange Rates: Investors should be mindful of foreign exchange rate fluctuations, as they can significantly impact the value of remitted funds. Understanding and monitoring forex rates is essential to optimize the timing and value of investments made under LRS.

How to Invest Outside India

There are several ways to invest overseas from India, each with its own set of considerations.

Invest in Foreign Stocks

Investing in foreign stocks allows you to own a share in a company located outside India. So, if you invest in the US stock market, you gain access to companies like Apple and Microsoft, which do not have a direct presence in the Indian market. As of 2023, foreign brokers like Interactive Brokers and Charles Schwab offer Indian investors access to over 135 international markets, including prominent exchanges like NASDAQ and NYSE.

As per RBI's regulations, Indian investors can invest with less than a 10% stake in any foreign company and should not have control over the entity in which they invest. This stipulation ensures that the investments are passive and not for gaining control or influence over the foreign company.

Invest in International Mutual Funds

For those who prefer a more hands-off approach, international mutual funds are an excellent choice. These funds pool money from various investors to buy a range of international stocks and bonds, managed by seasoned fund managers. The options are vast, from funds focusing on specific countries to those covering global indexes like the S&P 500.

Why consider these funds? They offer exposure to global markets without the hassle of picking individual stocks. Plus, the diversity helps cushion against market volatility. However, don't overlook the fees. These funds have an expense ratio, typically ranging from 0.5% to 2%, which affects the total returns.

Remember, past performance is helpful to look at but it does not guarantee future results. Also, changes in the currency exchange rate between the dollar and the rupee can impact your returns.

Invest in Debt Instruments

Investing in international debt instruments offers a way to diversify and potentially balance the risk in your investment portfolio. These instruments include government bonds, corporate bonds, and international fixed-income funds. For example, US Treasury bonds are known for their stability and are a popular choice among conservative investors.

The yields on these instruments vary, reflecting the economic stability of the issuing country. For instance, as of early 2023, the yield on 10-year US Treasury bonds hovered around 3%, a figure that's essential to compare with domestic options like Indian government bonds. When investing in foreign debt, it's crucial to consider the credit rating of the bond issuer and the impact of currency exchange fluctuations.

Invest in Foreign Real Estate/Property through REITs

Real Estate Investment Trusts (REITs) offer a unique way to invest in foreign real estate without the complexities of direct property ownership. REITs are companies that own, operate, or finance income-generating real estate across various sectors.

Investing in foreign REITs, like those in the U.S. or Singapore, allows Indian investors to gain exposure to international real estate markets. The performance of these trusts can be influenced by factors like local property market conditions and currency exchange rates. But, among all investments, real estate has the lowest level of liquidity.