The DIY route to international investing
If an international mutual fund is not for you, and you would rather invest in stocks overseas on you own, here is what you need to know
By Aarati Krishnan | Apr 12, 2019
A couple of days ago we looked at why you should diversify overseas. International investing is something that's often dismissed by retail investors, even though there is good reason to invest in global markets. For investors who do not have the time and skill to directly invest in stocks, mutual funds are the way to go.
But if you are fascinated with researching companies and are a voracious reader, then you may like to directly invest in stocks overseas without taking the help of a mutual fund. To make a start on direct overseas equity investing though, here are some basics you need to know.
Foreign exchange transactions undertaken by Indians are subject to FEMA (Foreign Exchange Management Act) and RBI regulations. RBI's Liberalised Remittance Rules (LRS) determine how much money Indians can remit abroad for investment purposes in any given year. Presently, the LRS cap stands at $2,50,000 a year, offering you quite a generous limit on your overseas exposure.
Opening an account
To make your international debut, you will need to open a separate trading account with a broking platform which is authorised to facilitate trades across international markets. Saxo Bank and Interactive Brokers are two popular platforms that many Indian investors use to buy stocks overseas. You need to be a resident Indian above 18 years of age to open an overseas investment account with such platforms. Typically, account-opening requires you to produce both identity and residence proof.
If you are an ICICI Direct customer, it is one of the few domestic brokers which facilitate the opening of an overseas investment account through a tie-up with Saxo Bank. Saxo Bank is a Denmark-based regulated bank in the EU which offers Indian retail investors access to equity and ETFs listed on more than 30 exchanges globally. If you decide to take this route, ICICI Securities helps you onboard the Saxo platform.
Interactive Brokers, a US-headquartered broker, also allows Indian investors to access a range of international markets through its trading platform.
Investing in stocks overseas entails a battery of charges and costs. One, the broking platform may levy account-opening charges in the form of a flat fee. It may also levy custodial charges on a monthly basis. Saxo Bank, for instance, charges a minimum five euros per month as custodial charges.
Two, you may incur a brokerage and transaction tax on every buy or sell transaction that you make on the platform. These components will vary depending on which market you home in for your investments. The platform that you access may also insist on a minimum account balance or a minimum level of activity each month.
These apart, you may have to contend with wire-transfer charges every time you top up your overseas account. Currency-conversion charges may be applicable too, if you transact in a currency that is not the default currency for your account. If you open a dollar-denominated account, for instance, you may incur a conversion charge whenever you use pounds or euros to buy stocks listed in the UK or Europe.
Given the battery of costs involved, therefore, it may be viable to maintain an overseas investment account only if you plan to invest substantial sums overseas (say `10 lakh or more), and plan to be active with your stock choices.
While opening an overseas investing account may be the easy part, it is your allocation choices between geographies and sectors and the kind of stocks your select for your portfolio that will make or break your returns.
If you would like ready-made recommendations, platforms like Saxo or Interactive do offer research services on a subscription basis. Alternatively, you may like to do your own research based on online resources. In this respect, investing in US-listed stocks may be easier than selecting stocks from other markets, given the prodigious amount of equity research that is available online on US companies.
While a lot of this information tends to be behind paywalls, stock newsletters and websites such as Seeking Alpha and Motley Fool offer independent views on global companies. You can also look to tapping Barron's, Morningstar, Investing.com and similar entities for financial information on global companies.
Do remember that your returns from overseas stocks will depend not just on the business performance of the companies you own but also on the behaviour of the currency that you invest in vis-a-vis the rupee.
So, if you don't have time to spare for research or are planning on a limited overseas exposure, the mutual fund route is far simpler than a DIY strategy.