The recent run-up in the tech-heavy NASDAQ has drawn investor attention to international equity. What are the pitfalls that an Indian investor should avoid while buying overseas stocks directly? What guidelines would you give for stock selection and portfolio management as far as overseas stocks are concerned?
Rajeev Thakkar, CIO, PPFAS Mutual Fund:
Firstly, the recent run-up in stock prices should not be the criterion for investing in global stocks. Equity investing, whether in India or abroad, works well only if the investment horizon is long term in nature. There can be severe volatility in stock prices and the technology-related shares have had their fair share and more of this volatility.
Investment in global stocks is recommended for diversification and for a larger opportunity set rather than for chasing past returns. The criteria for stock selection should be the same as for any other equity share:
- Good quality management
- Business with quality characteristics (high ROCE, low debt, reasonable margins, growth prospects)
- Some entry barriers/moat/ differentiation in the business model
- Reasonable valuation
From a portfolio perspective, individual and sectoral stock weightages should be kept in mind. One should not be overexposed to a particular stock or sector.
Investors can choose to invest directly in overseas stocks or via mutual funds in India. While investing via mutual funds for foreign stocks is very similar to investing in mutual funds for Indian stocks, direct stock investing requires special care and attention to the following factors:
1. Exchange rate spreads
Banks typically give unfavourable exchange rates for small amounts of remittances abroad. One has to choose the bank carefully and work out the fund-transfer modalities and negotiate the rates in advance. Else, a maybe 2 per cent fee/spread for remittance would be akin to an entry load and would not be in the investor's interest.
2. Tax collected at source
Investors should be prepared to pay 5 per cent of the remittance amount (in excess of Rs 7 lakh) as tax collected at source. This can be claimed in the income-tax returns.
3. Inheritance tax
Depending on the country of investment, there can be a fairly steep inheritance tax in the unfortunate circumstance of the investor passing away.
4. Taxes in a foreign country as well as in India
Investors should keep in mind the taxation provisions for dividends, capital gains, etc., both in the foreign country and in India before investing.
5. Impact of currency movement on portfolio valuation
Typically, rupee depreciation adds to the returns from foreign stocks. However, if the rupee were to appreciate, it would reduce the value of the foreign stocks. Foreignexchange volatility affects the portfolio value.