So you've either mastered the game of Indian stocks and mutual funds or are adventurous and considering to go bigger, to go international.
Maximising returns while minimising risks is the essence of smart investing. And dipping your feet in the international market is important to diversify your portfolio with stable and fast-growing assets.
If you want to deep dive into global investments and wish to learn how international markets work, we have the perfect course for you, Finance Pass: Winning With International Investment. This detailed course is your ultimate guide to learning everything you need to get started with international investing.
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In this guide, we have compiled a list of key points to consider before beginning your international investment venture.
Your investment options to get started
It’s great that you’ve made up your mind to diversify your investment portfolio and take it global, but the process of getting started in international markets is very different from the domestic markets.
Getting a handle on the Indian stock market was difficult enough, so let us make it easier for you. Here are three options you can consider to get started with your international investments.
- Direct investments
- Index funds & ETFs
- International funds
- Advantages of international investing
- Disadvantages of international investing
- Direct investments
This is the most accessible and straightforward method of international investing. You can use apps that provide access to foreign stocks for simple investments allowing you to invest directly in global markets. Groww and INDmoney are two popular platforms among Indians for investing in US stocks. You can also look into Indian brokerage firms, as the vast majority of them now provide their clients with access to all the major global markets.
2. Index funds & ETFs
We've discussed the direct method; now let's look at the indirect method of investing in foreign markets. One option to invest in global markets indirectly is through exchange-traded funds (ETFs), or international mutual funds that invest in foreign funds.
To put it simply, you invest in a mutual fund in India that invests in one or more ETFs, index funds, or securities outside of India. This is your best first step towards diversifying your portfolio and getting exposed to foreign markets.
A majority of India's asset management companies (AMCs) have come up with international funds. For example, last year HDFC Mutual Fund announced a global scheme that will allow its users to invest in funds across 23 countries (Source: Moneycontrol).
Note: The following information is not professional advice; we advise you to conduct your own research and make your own decisions.
3. International funds
Alternatively, you can directly invest in international funds, better known as equity funds owned and managed by foreign experts for investments in their home countries. Even though there are various RBI regulations involved here, this is another great way to gain exposure to foreign markets while using experts from those nations.
PS: You do not have to practise only one of these; you can combine two or even all three.
Advantages of international investing
If you've made it this far, you're definitely very excited about the prospect of international investing. To get you even more excited, here are the top benefits of international investing that you wouldn’t want to miss:
Diversification is one of the biggest advantages of international investing. In order to maintain stability, it is important to have a well-diversified portfolio. Such diversity helps reduce the correlation between your investments as your money is spread across multiple assets. As a result, volatility in one market is unlikely to affect your other assets.
- Protection of investments
When talking about international investments, the protection factor against fraud and liquidations comes into play automatically. There are generally strict regulations governing markets in developed countries to ensure good corporate governance and impose harsh penalties on market abuse. This protects retail investors from fraud and insider trading losses.
It is important to keep in mind that capital is always at risk, but many foreign financial institutions provide protection from seizures and other threats, like the liquidation of broker-dealers.
- Diversification of currency
The recent trend of the Rupee's value against the Dollar has revealed that the Rupee has depreciated by 9.8% per cent this year (Source: TOI). However, through differentiated currency exposure, any investment in the dollar (USD) can result in a 9.8% return increase. Depreciation of the rupee and global market volatility can be hedged by investing in foreign assets.
Disadvantages of international investing
The benefits of international investing sound fantastic don’t they? But, as with anything, there are some drawbacks to international investing, that you should be aware of.
- High transaction rates
A significant disadvantage of investing in global markets is the transaction cost, which varies depending on the foreign market. Direct access to foreign markets is currently prohibitively expensive for brokerage accounts.
To help you calculate your total cost of exposure when investing in the foreign market, consider the following key costs:
- Per-transaction costs
- Minimum billings
- Tax charge from both governments
There is a possibility that profits made in another country will be taxed as per their tax regime. In that country, you may be required to file a tax return. Furthermore, as a tax resident of India, you may be required to pay taxes in India as well. So you may not receive the profit you expected, but if you know your way around filing taxes correctly or have a brilliant CA friend, you may be able to keep the majority of your profits.
For example, if you own US stocks, you will be charged a flat rate of 25% of your investments as tax (Source: Groww).
- Volatile currency
Before investing directly in foreign markets, you must first convert the amount from INR into the respective foreign currency, at the current exchange rate. Let's say you own a foreign stock for a year before selling it, the foreign currency is then converted back into Indian rupees. You may benefit or suffer depending on the domestic currency's movement.
These are all the important things you need to know before investing in international stocks. If you wish to learn more about global markets and how they work, you can register for our course, Finance Pass: Winning With International Investment. We will also cover a number of other personal finance topics such as budgeting, insurance, emergency funds, and investing mutual funds, to assist you in becoming your most financially independent self.
So why wait? Sign up with Kool Kanya today!
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