Investing in foreign stocks from India allows investors to gain exposure to some of the world’s most valuable and well-known firms, including Microsoft, Apple, Google, Tesla, Amazon, Alibaba, and Netflix, as well as traditional companies like Samsung, Saudi Aramco, Visa, LVMH, and Tencent Holdings.
Investing in foreign stocks from India is legal, and you can allocate a reasonable and affordable amount of your portfolio to such stocks to diversify your portfolio. Residents of India are allowed to transmit up to $250,000 every financial year for portfolio investments and other permissible transactions under the Liberalized Remittance Scheme (LRS) of RBI.
Furthermore, the extensive information and good governance requirements of these companies and stock exchanges allow you to comprehend better the investments you have made.
Why should traders invest in foreign stocks?
Before we get started, let’s talk about why you should invest in foreign stocks. Are they superior to Indian firms? First, you must decide why you wish to invest in international companies at this point.
The Indian stock market has around 5,500 businesses listed. Aren’t they sufficient? Furthermore, which is a better investment: Indian or international companies?
We’re not in a position to respond to the second inquiry. However, it won’t be fair if a guy in his twenties sits on his couch and judges these Indian vs. MNC enterprises and decides which is superior.
We’re talking about multibillion-dollar corporations here. Google, Apple, Facebook, Amazon, Samsung, Cisco, Tesla, and other large corporations are far too large to comment. However, these businesses have a lot of cash, highly qualified professionals on staff, and a management team that is a prominent innovator in their field.
In any case, several large Indian firms can compete with numerous global firms. So let me now address the first question: why invest in foreign equities in the first place.
Investing in Foreign Stocks has its Drawbacks
Every coin has two sides to it. So before investing in foreign stocks from India, there are a few things you should know:
Be prepared to pay a lot of money
You’ll be dealing in foreign currencies if you are investing in foreign stocks from India. for example, if you trade stocks in the US, you must pay brokerage fees in US dollars.
As a result, stock brokerages may be slightly higher than those in the Indian stock market. Similarly, compared to domestic accounts, annual/monthly maintenance fees may be greater.
The currency exchange rate has an impact on profits
Currency risk is always there when investing in foreign stocks from India. Let’s look at an example to help us comprehend.
Assume you’re planning to invest in the US stock market. When you acquired the US shares, the currency exchange rate was $1= Rs 68. However, let’s imagine the Indian rupee strengthened the next year, and the currency conversion rate became $1 = Rs 62 when you sold the US stock.
Indian residents can invest only up to $250,000 in foreign markets
An Indian resident individual can only invest up to $250,000 overseas every year, according to the RBI’s regulation in the Liberalised Remittance Scheme (LRS). This amount comes to almost 1.7 crores at the current currency rate of $1= Rs 68. In any case, if you have a family of four, you can invest four times $250,000 for a total of one million dollars. Isn’t that enough money to invest?
What is the best way to invest in international Equities- Modes and Methods
Now that you’ve grasped the fundamentals of investing in foreign stocks from India, here are three easy ways to get started:
An investor can invest directly in foreign equities by opening an overseas trading account with an Indian broker that has partnered with a foreign broker. However, certain overseas brokers may ask investors to make a minimum deposit, which may increase their capital requirements.
ICICI Direct, HDFC Securities, Kotak Securities, Axis Securities, Reliance Money, and other full-service Indian brokers have partnered with foreign brokers. They’ve made it quite simple to register an account with one of their partner (international) brokers in another country. These full-service brokers can help you invest in international stocks.
Example: If you have an ICICI direct account, you can invest in worldwide markets through their broker partner Interactive Brokers LLC.
Create an account with a foreign brokerage firm
Indian citizens can open accounts with selected international brokerage firms trade in international equities, mutual funds, and other securities.
In reality, some foreign brokerages, like PrimeFin, have access to India, where you may visit, get your questions answered, and open an offshore trading account. It is the best UK-based trading broker, providing trading services in India.
Invest through Modern Trading Apps
Many fintech businesses have introduced smartphone applications that streamline the investment process and enable Indian investors to participate in international stocks.
Invest through LRS Limit
LRS Stands for Liberalized Remittance Scheme. Investments outside India are governed by India’s foreign exchange legislation and rules. However, resident Indians can invest in foreign stocks or bonds through their portfolios under the RBI’s LRS, which allows them to transmit up to $250,000 every financial year for any allowed current or capital account transaction, or a combination of both. The LRS would also cover the Gift City International Financial Services Centre (IFSC) investments.
In addition, LRS is exclusively applicable to Indian citizens. It does not apply to non-resident Indians (NRIs). Hence, NRIs are not restricted by the investment restriction of $250,000 per financial year. Moreover, they have unrestricted access to their abroad assets and can remit up to $1 million every fiscal year from India.
Invest in GIFT city IFSC listed foreign stocks
The India International Exchange Limited (IFSC), also known as India INX, an arm of BSE, and NSE International Exchange, a wholly-owned subsidiary of NSE Ltd., are the two largest international exchanges situated in the IFSC at Gujarat International Finance Tec-City (GIFT City). These stock exchanges provide Indian investors with an international trading platform to invest in overseas stocks.
Invest in Mutual Funds
An investor can also use mutual funds for investing in foreign stocks from India. Traders can invest in either an international or an Indian fund that invests in overseas stocks. Index funds that invest in international indices and others can also be used as a backdoor way to invest in overseas companies.
Investors who don’t have an excellent grasp of the stock market but wish to diversify their portfolios should consider this method of investing in foreign stocks.
Considerable Factors Before Investing in Overseas Stocks
Apart from the in-depth examination of the investee firm, an investor should be cautious before investing in foreign stocks and consider the following factors in general:
Country Related Risks
When you are investing in foreign stocks from India, you must be aware of and assess the risks connected with the investment location and country. Geopolitical risks, macroeconomic considerations, and the specifics of the investee entity, as well as future commercial possibilities, must all be considered. For example, investing in the stock market in a country with a high risk of war or conflict with India should be avoided.
Risks of Foreign Exchange Fluctuation
Similarly, the currency risk of fluctuating foreign exchange rates cannot be avoided. Foreign exchange fluctuation refers to the volatility of a currency such as the US dollar or the British pound in relation to the Indian currency, resulting in profit or loss for the investor. As a result, any foreign exchange fluctuation risk should be factored into the target returns.
For example, if the US currency is predicted to increase against the Indian rupee, you will receive a bigger return in rupee terms and vice versa.
Risk of Volatility
Volatility risk is defined as swings in the prices of equities in either direction. Volatility is the risk associated with the magnitude of variations in a stock’s value. The higher the volatility, can riskier the stocks as the price of the same becomes uncertain. Therefore, stronger established markets with lower volatility are preferable from an investing standpoint.
Economy Related Risk
Economic risk refers to an adverse change in an economy’s macroeconomic variables. For example, unemployment, interest rate fluctuations, political instability, unfavourable changes in regulations, and so on are just a few issues that can significantly impact an organization’s operations and, as a result, its share values. As a result, before investing in any foreign stock, an investor should consider all of the country’s macroeconomic characteristics.
Investment Costs for Foreign Stocks
You have to pay many types of costs under an investment plan. Here are some of them:
It’s worth noting that the transaction cost of investing in foreign stocks from India is typically higher than investing in Indian companies. This is because the gap between a foreign currency’s buying and selling rates is one hidden transaction cost.
Some important components of transaction costs are:
- Brokerage Cost
- Margin Money
- Banking Cost
Tax Collection at Source (TCS)
In the case of an Indian investor making an investment in foreign stocks under LRS, tax collected at source (TCS) at a rate of 5% would be levied and managed by the authorized dealer bank in accordance with Section 206C (1G) of the Income Tax Act, 1961 (“IT Act”), provided the remittance exceeds the prescribed threshold limit of INR 7 lakh in a particular financial year.
TCS would be applied on payments in excess of INR 7 lakh. If a PAN card or an Aadhar card is not available, the TCS rate may be increased to 10%. On the other hand, The amount of TCS collected can be claimed as a tax credit by the investor when completing their income tax return in India. As a result, it is a tax on the transaction that can be credited against other income in India or claimed as a refund, depending on the situation.
While investing in foreign stocks from India is a fantastic way to diversify your financial portfolio, you should only do so after conducting thorough research. Finally, investors should consider their investment horizon, risk-return preferences, financial goals, and risk tolerance before investing in international stocks. You can read about investment planning strategies.
In addition, investors must adhere to exchange control legislation, register foreign assets and income, and assure compliance in the country where they invest.