There are two ways for Indians to invest abroad, but their effect is very different
07-Oct-2013 •Dhirendra Kumar
The current account deficit is the biggest villain in the crisis that the Indian economy is facing, gold imports are major cause of this deficit, and now that the government has tamped down gold imports, the villain is on its way to being licked. The rupee, specially, is being nursed back to good health. These are a set of beliefs that have become quite common nowadays. This narrative could be gross oversimplification, and even wrong in parts, but believing it is an inevitable by product of absorbing what has been said and written in the media over the last few months.
Equally common is the counterpoint that people are right in buying gold, because it appears self-evidently the most successful way of escaping the poor returns that financial investments--either in equity or debt--that the Indian economy is trapped in. Effectively, buying gold is the way for your money to secede from the Indian economy, a sort of an outward FDI that every individual and every family makes when they buy gold. It doesn't matter that you go to the local jeweller or bank to buy gold--since India is a net importer of gold, the money effectively goes out of the country and you are left with an asset that, along with its intrinsic global price, will be independent of the rupee.
Interestingly, many people are not aware that there's another, better, way of doing this, which is to invest in foreign stocks and bonds, something that is open to every individual. The most convenient way of doing this is to invest in Indian mutual funds that invest abroad. The interesting part is that in terms ofmoney flowing out of the country, these two methods of investing abroad are actually opposite of what they appear to be. When you invest in foreign financial assets, the money will eventually come back and be converted into rupees, likely at a higher value which reflects the intrinsic investment as well as the currency gains. There's no other way to enjoy the gains. But if you had bought gold, the money has flown out of the country for ever!