Home bias is a common behavioural bias that one encounters among investors, many individuals are comfortable investing in their home country purely due to their familiarity. Gaining international exposure in the portfolio is gaining popularity as a greater number of investors are understanding the benefit of cross-country diversification.
Top reasons to invest in international investment:
1. Reason #1: Lower Country Risk:
Investing in global investment avenues helps you to lower country risk and geopolitical risk. It also helps you to get the benefit of investing in developed markets which come with their own set of advantages. Further, some of the companies have a growth rate unparalleled to others.
2. Reason #2: Invest in Companies with a Global presence:
Some global companies have a large outreach and engage in opportunities that may not be feasible for local companies and may not be able to fathom such investments, given their limited set of resources.
3. Reason #3: To build a Global currency corpus:
While many individuals may be unwilling to participate in the currency market directly. Investing in foreign turf through equity stocks or funds, provide exposure to foreign currencies. You can time the entry and exit depending on the movement of currency. This is a great way to build a corpus using the global currency for your financial goals. Thus, your investments are not solely dependent on INR fluctuations.
Additional Read: What Is The Average Recovery Time For Global Market Downturns?
3 ways to gain international exposure in your portfolio:
1. Investing in equity stocks traded on foreign stock exchanges
You can invest directly in international stocks by using certain online platforms which facilitate such investments. However, it is not a very conducive process, the stocks are traded in their home country, and investing in a stock that is trading in dollar terms can be quite expensive when converted to Indian currency. A majority of broking houses have tie-ups with a foreign broker and offer investment opportunities in developed markets since they have gained popularity over the years.
So, in order to invest directly in stocks that are traded in the US stock exchange, the investor has to open a demat and trading account with a broking house that has a tie-up with a foreign broker who is registered as a broker with the Securities and Exchange Commission (SEC). SEC is the SEBI equivalent in the US. In other words, one sets up a foreign currency bank and brokerage accounts under the RBI’s liberal remittance scheme (LRS) and directly buys foreign securities.
A demat/trading account needs to be opened in order to execute this transaction. However, there are 2 options to open a demat account:
a. With a foreign broker
The first option is to open an account with foreign brokers directly, there are few foreign brokers particularly from the US who allow Indians to open foreign broking accounts to trade in equity stocks listed on US stock exchanges. Some of them even have local offices to adequately address the requirements of Indian investors.
b. Using mobile platforms to trade
Many new start-ups help Indians invest in equity stocks that are traded on foreign stock exchanges. These platforms offer demat / trading account at no cost including free accounting opening, zero brokerage, zero maintenance, etc. This mode of investment is preferred by the investors who are always on-the-go as it offers to invest with just a click. There is particular interest among Indian investors to gain exposure to US-based stocks/funds since they are the strongest economy.
Additional Read: How have Global Indices Fared During COVID19?
2. Investing through ETFs indirectly
There are few exchange-traded funds in India which offer international exposure such as MOSt Shares NASDAQ 100 which provides exposure to stocks traded on NASDAQ. Reliance ETF Hang Seng BeES is yet another ETF that provides exposure to stocks traded on HangSeng which is a Hong Kong-based stock exchange.
3. Investing in Indian mutual funds with International flavour
While exposure in stocks and ETFs requires the investor to hold a demat, an individual without a demat account can gain exposure by investing in certain Indian mutual funds which have an international flavour. There are quite a few funds that provide exposure to developed and emerging markets. This is the easiest means to gain exposure to global equities. These funds are mainly FoF (Fund of Fund) and hence the taxation aspect needs to be kept in mind at the time of investing.
Investing directly can be an arduous task for an investor who does not understand the dynamics of the currency market. For someone who can tackle these aspects efficiently and has a sizable corpus to invest in global equities can use this route. ETFs and mutual funds enable retail investors to participate in global equities with much lower funds. Want to invest internationally; connect with us at Tata Capital Wealth and we shall guide you ahead.
13 October 2021
5 mins read
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