How to Invest in Overseas Stock Markets?

Investor's dream of overseas investments

Dear Friend!

Thank you very much for raising an issue that has deep impact on the wealth creation of Indians.

There are great businesses out there in highly innovative and enterprising countries like the US, UK, Germany and so on.

As an Indian investor you have two choices as follows:

1. Direct Investment in stocks trading on overseas stock exchanges.
2. Investing through India based mutual funds that provide opportunities to own overseas companies through the mutual fund route.

Now let us examine the feasibility and pros and cons of both the avenues in detail.

Direct Investment in Overseas Stocks:

Investing abroad is feasible only when a country’s currency is convertible on the capital account. Indian ‘Rupee’ is still not totally convertible. However, the Reserve Bank of India (RBI) has permitted overseas investments by Indians in various classes of assets, including stocks up to a specified limit. It used to be US$ 200,000 per annum. I have to check what the latest limit is. This is a huge limit for an average Indian.

Having said this, I had personally explored the feasibility of investing directly abroad but found it practically not feasible for investors with limited investible means like me.

The hurdles were on account of:

Minimum Transaction value: Stock brokers lay down minimum transaction value ranging from US$ 1000–2000 which translates into a huge sum in India rupees.

Flat and high brokerage charges: Flat brokerage charges of US$ 10–20 were stipulated per trade/ transaction, which again is steep and unaffordable for Indian because of huge rupee-dollar exchange difference.

Steep Folio Charges for each scrip/ stock: The demat account (the account to hold stock in a de-materialised form) folio charge for each scrip, which is payable every year was again very high.

In conclusion, direct investment in stocks abroad is practically ruled out for small Indian investors.

Indirect Investment Through Mutual Funds:

I understand that a few funds who have set up shop in India are offering opportunities to invest abroad through the mutual funds route. Following are a few examples:

• Motilal Oswal Nasdaq 100 ETF
• ICICI Prudential US Bluechip
• Franklin Feeder US Opportunities
• DSP BlackRock US Flexible Equity

I am keen to explore this avenue but actually could not find the time to actually implement it.

Please read the interesting article “Be Indian, buy American” by Value Research.

In conclusion, it looks impractical for small Indian Investors to invest in stocks directly abroad but very much feasible through the mutual funds route.

Suggested Further Reading:

• What are the Hurdles to Invest and Earn Dividends from Foreign Markets?

To summarise it is indeed feasible to invest in overseas stock markets and one should certainly invest overseas to partake in global opportunities as well as a diversification or de-risk strategy.

Thank you,

With Best Regards,

Anand

What are the Hurdles to Invest and Earn Dividends from Foreign Markets?

Following are the general reasons why people prefer to save and invest and earn returns and dividends from their own country:

1. Familiarity and ease of transaction: People are more familiar with the general economic environment, laws, taxation and so many other related aspects prevailing in their own country. Even the service providers like banks, stock brokers, insurance agents and so forth are also well versed with the systems of the native country. So it is more easy to transact in one own country.
2. Legal Restrictions/ Hurdles: Many countries, including our own India till recently, have legal restrictions in investing abroad, primarily to conserve foreign currency reserves. Even in India until a few years ago there were restrictions, which were eased. Unless revised subsequently, Indians were permitted to invest only up to US$.2.50 lakhs per annum abroad. Even when this is legally permitted, because of political sensitivities surrounding issues like laundering of black-money abroad, even genuine investors may face harassment from various authorities.
3. Costs and Minimum holdings constraints: Once I was seriously exploring purchasing shares in the US, sitting in India. It is quite possible, technically. There are online brokerage firms that permit you to buy on US stock exchanges, but there were many minimum criteria that were impractical for a small investor from India. Suppose there is a minimum trade fee of $10 per transaction it translates into a whopping Rs.670 flat for one transaction that is totally unaffordable. There are many minimum criteria like ledger folio charges, minimum investment amount and so on which make it practically unviable for small Indian investors.

Having said this, Goldman Sachs, a foreign mutual fund operating in India is offering certain limited access to overseas markets through their 'Exchange Traded Fund (ETF)' products. Please see the picture below.

Similarly, a few other funds also may be offering avenues for limited investing abroad.

In conclusion, it is not impossible for investors to make investments and earn dividends and returns from overseas markets, but a few practical hurdles restrict scale of such transactions.