OFFSHORE INVESTMENTS

Are you also among those who dream of investing in big companies like Apple Inc, Alphabet Inc, Amazon, Facebook, and so on? But what if I tell you that you can take exposure in any of these companies or any other company in another country across the globe? Yes, you heard it right. Nowadays, investing is not just confined to any geography rather it has blessed investors with ample of investment opportunities cross border as well. In the present news-driven era, where a lot of information is being shared across the globe, it can easily catch investor’s fancy towards other emerging and developed nations. Most of the investors fall back on international equity markets for diversifying their investments and to gain from the opportunities emerging in those countries.

But how do you make any investment abroad is still a question to be answered? Well, one can invest in equity markets abroad either directly or can invest with the help of mutual funds. We will discuss how you can go about investing through both of these routes in detail and will also learn about the various advantages and flip sides of investing overseas.

THE BENEFITS…

1.) Cross border diversification

The investor will be better off if he/she directs a certain percentage of their investible fund towards international equity markets. Investors usually find better opportunities in other countries when their home country go through a rough phase and can earn better returns from cross border transactions. Hence, an investor should allocate at least 10% of their assets towards international markets.

2.) Exposure in big multinationals

The investors get a chance to invest in big companies like Facebook, Google, etc. These companies are relatively big in terms of operations and revenues they generate. An Indian investor can take exposure in multiple big corporates if he/she chooses to invest through mutual funds or can own a share in any of these companies by directly buying equity shares from open markets.

INVESTMENT ROUTES

1.) Investing directly

In order to buy equity shares directly, one has to open an overseas trading account with the international broker. We at Agile have tie-ups with international full-service brokers who help you to invest in foreign equities. The Demat and trading account will be opened in your name and you can invest in US  under the Liberalised Remittance Scheme of RBI.The limit is US $ 250,000 per year.

2.) Investing through mutual funds

Another and more simplified way of taking exposure in international securities is through international mutual funds. These funds hold securities of countries other than the domicile country. These funds generally have a tie up with a foreign fund (called as host fund). For example, if the Indian mutual fund company sees potential in U.S. then it will tie up with any U.S. fund and launch a feeder fund in India. The Indian investors will invest in this feeder fund in Indian currency only. The collected funds will then be transferred (after conversion) to the U.S. fund which in turn will invest in securities in U.S. markets. There is no limit of investment, if you are investing in other countries through Indian mutual funds. Whatever will be the gain/loss will be shared by all the investors. Few examples of foreign funds in India are: –

  • Franklin India Feeder- Franklin Opportunities fund
  • ICICI Prudential US Bluechip Fund
  • DSP US Flexible Equity Fund

THE FLIPSIDE…

1.) Applicability of LRS scheme

Liberalised Remittance Scheme (LRS) established by the RBI in 2004, allows an Indian resident to invest only up to $250,000 overseas in a financial year. If we convert it into rupee terms then it would be roughly around 1.7 Crores.

All resident individuals, including minors, are allowed to invest under the LRS scheme. In case of remitter being a minor, the LRS declaration form must be countersigned by the minor’s natural guardian. The Scheme is not available to corporates, partnership firms, HUF, Trusts, etc.

2.) Currency risk

The investors should be aware of the foreign exchange risk while investing abroad. If the domestic currency gets stronger against foreign currency at the time of redemption then it will lead losses to you. For example, at the time of investment the exchange rate was 1$ = 70 but at the time of redemption the rupee gets stronger and the exchange rate reaches at 1$ = 65.  What this means is that you have incurred a loss of 7.1% due to currency fluctuations. Though we cannot deny the fact that currency can move on either sides and can even bring gains to investors.

3.) Political Risk

Foreign investments suffer not only from currency risk but from political risk as well. Any major changes in the policies and framework of the target country may put your investments on risk.

4.) Higher charges on direct equity investment

You will have to bear higher transaction charges as brokerages will have to be paid in dollar terms. This in comparison to direct investment in Indian equity markets will be much higher.

What are the prohibited items under the Scheme?

The remittance facility under the Scheme is not available for the following:

  • Remittance for any purpose specifically prohibited under Schedule-I (like purchase of lottery tickets/sweep stakes, proscribed magazines, etc.) or any item restricted under Schedule II of Foreign Exchange Management (Current Account Transactions) Rules, 2000.
  • Remittance from India for margins or margin calls to overseas exchanges / overseas counterparty.
  • Remittances for purchase of FCCBs issued by Indian companies in the overseas secondary market.
  • Remittance for trading in foreign exchange abroad.
  • Capital account remittances, directly or indirectly, to countries identified by the Financial Action Task Force (FATF) as “non- cooperative countries and territories”, from time to time.
  • Remittances directly or indirectly to those individuals and entities identified as posing significant risk of committing acts of terrorism as advised separately by the Reserve Bank to the banks.