If you are struggling to keep your investments in the black, it is time you diversify in the international markets. Here’s how to invest
With the Indian currency and equities on a roller-coaster ride and the consequential FII (foreign institutional investor) exodus making the market choppier, adequate diversification has now become more important than ever. However, investing across the domestic market can no more secure your position fully; it is crucial to diversify into foreign markets to balance your returns. With Indian investments currently going through turbulent times, chances are, the investments in foreign markets can set off losses incurred in the Indian market.
Investing in foreign stocks basically helps to shift risk and act as a form of insurance against a volatile economy and a hedge against an investor’s Indian portfolio. There are many investment options available on an international platform, such as foreign securities, commodity derivatives and so on. Investors can also invest in the world’s biggest blue-chip companies. Says B. Gopkumar, excecutive vice-president and head- broking, Kotak Securities, “Investors can go through an Indian broker who has a tie-up with a foreign broker.”
Adds Sunil Mishra, CEO, Karvy Private Wealth: “If information on global markets is made available to investors, there can be a lot of interest in offshore investments.”
One can start by approaching an Indian broking firm, which acts as an intermediary between investors and foreign broking partners who trade on behalf of investors.
Open an account. To open an account one has to first fill an application form supported with identity and residential proofs followed by fulfilling the requirements of the know your customer (KYC) norms applicable to the country. After registration investors are provided with the bank account details of the foreign broker, where one can transfer the funds to trade. An investor can trade in many global currencies; however, he has to decide the base currency in which he or she would like to transact.
Buy and sell shares. After opening an account, one is provided with a client login ID and a password along with an account executive to provide necessary assistance. Says Vishal Gulechha, executive vice-president and head of equities, ICICI Securities, “Overseas investments are available only to individuals and according to RBI’s Liberalised Remittance Scheme (LRS), investors can invest up to $200,000 per year.”
ETF route. Besides investing in individual stocks, investors can also invest in foreign stocks through exchange-traded funds (ETF). ETFs are like index funds and are benchmarked against a group of securities like a stockmarket index that invest in all the scrips in exactly the same proportion as they are in the benchmark index. They require you to have a demat account. They combine the advantages of a mutual fund and a stock and can be bought and sold at real-time prices on an exchange.
Investors can now invest in international giants, such as Apple, Google and so on, with a small investment. Also, Motilal Oswal Mutual fund (MF) has launched most shares on NASDAQ100, a US equity-based exchange traded fund (ETF).
Does One Need To Keep Margin Money?
When trading in international stocks, one is allowed to buy and sell shares only if there is sufficient cash balance in one’s trading account. Says Gulechha, “The investor is required to keep money with the international partner of the Indian equity broker. To transfer funds one must follow the process of fund remittance that includes submitting application-cum-declaration form under the $200,000 scheme, Form A2, form authorising the designated bank branch as authorised dealer, and so on. Once the funds are transferred, clients can buy and sell stocks on the online platform.”
Risks ahead. One should be careful about the following risks when investing in foreign stocks:
- Currency risk. Says Gopkumar, “Currency risk is the biggest risk an investor faces as Indian rupee is currently as volatile as Indian stocks.” Assuming you are investing in rupees, if rupee depreciates, investing in foreign stocks becomes cheaper, and vice versa.The investor, however, should know that if rupee appreciates, there are chances of losing value. Says Mishra, “Timing the currency movement is very difficult.”
- Country risk. Investors also face country risk, which is the risk of losing money due to an unfavourable change in a country’s economic policies or monetary policies that could affect the performance of stocks.
Should you invest? Says Gulecha, “Till global liquidity adjusts itself, asset prices would continue to be volatile. Therefore, we advice caution in acquiring foreign equities till the excess liquidity gets absorbed.” When investing in foreign stocks, investors should have sufficient knowledge about the opportunities available in the foreign market so to benefit from global diversification.