Private wealth management firms have been very active since the late 2010s in offering global investing opportunities to their clients – This momentum has now increased thanks to fintech companies who have made even a 1 USD investment possible and the process of investing and monitoring portfolios an extremely easy one!
As per media reports, individual Indians have spent over $35 billion overseas via the Reserve Bank of India’s liberalized remittance scheme (LRS) since 2015 and increasing at about a half million dollars each week. Learn more about this new diversification opportunity in our piece below!
Why Invest Abroad?
The 10-year returns of India’s S&P BSE Dollex (the Sensex in dollar terms) is 7% or so compared to 15% delivered by US’s S&P 500 (also in dollar terms) over the same period. Even if India outperforms foreign markets, the lack of perfect correlation between different markets itself reduces portfolio risk and therefore makes sense.
While this behavior may change, the nature of the US markets and the underlying economic innovation means that investors will always have cutting edge opportunities available. Stories like Apple , Facebook, Tesla, Citi , McDonald’s – thousands of well known brands are something that’s now well within investor reach. And more stories develop each passing day!
Whats more, US markets allow fractional share investing – meaning you can even own a “quarter” of a single share if affordability is an issue or if you just want to test the waters with a small investment.
The RBI Regulation:
As an investor, you can invest upto $250,000 per year without the explicit permission of the Reserve Bank of India under the Liberalised Remittance Scheme (LRS). As per https://rbidocs.rbi.org.in/rdocs/content/pdfs/03MD11022016_AN.pdf, you would need to select the purpose code S0001 I.e. Indian Portfolio Investment abroad in equity shares under the purpose group Foreign Portfolio Investments. The potential list of investments you can do is available at https://rbi.org.in/Scripts/NotificationUser.aspx?Id=10192&Mode=0. Please also visit https://m.rbi.org.in/Scripts/FAQView.aspx?Id=115 for FAQs.
All resident individuals, including minors, are allowed to invest under the LRS scheme so it could be very useful for saving for international studies or trips a few months or years down the line. The Scheme is not available to corporates, partnership firms, HUF, Trusts, etc.
How to Invest abroad?
Prabhudas Lilladher has completed a beta test of its high tech digital global investing platform , in partnership with a US based fintech company . This platform not only opens your international trading account in 24 hours but also completes the RBI formalities almost entirely digitally.
The form filling itself is a 10 minute process and after you have confirmed a couple of declarations, just wait for a confirmation from the international trading partner who confirms receipt of funds and readiness of your account by email.
Zip Zap Zoom!
Your stocks and funds will remain in the custody of one of the world’s top 5 banks and you may freely correspond with them via a mobile app or email.
The documents required to open the account along with the application form are simple ones like scanned copies of your Identity proof such as passport or pan card, residential address proof such as Voters ID card or latest bank statement as the documents required. The forms you fill up online will include your KVC, your banking account details, the RBI’s Form A2 , a Foreign Exchange Management Act (FEMA) declaration, a Form authorizing the bank to act as a designated dealer and your base currency. Most of this information will be copied onto each form so you don’t need to spend much time doing all this,
Once your account is opened and funds are transferred, you will be allowed to access your foreign brokerage account with a Client Id and a Password. You can now buy and sell shares of the listed foreign companies. You will also get a comprehensive agreement which details all the modalities via email.
There is no need for a separate account like a demat etc as when you buy shares in the US, the shares bought buy will be kept in a pooled account with the foreign brokerage’s custodian but will be reflected in your trading account.
Transacting Options:
Our platform, to be launched soon, gives access to the following types of investing options to Indians wishing to invest abroad
- Global Guru Investment Philosphies where the algorithms would run on all US listed stocks and 150 ETFs to identify the investments that can replicate the Benjamin Graham or Peter Lynch principles for you or invest in asset allocation products which have a mix of gold, debt, equity and cash
- Thematic Baskets which will allow you to participate in specific themes like investments in Obesity control related sectors etc
- Direct Investments into stocks listed in the US even including fractional shares
- Direct Investments into US ETFs
These investments will happen at extremely reasonable rates and no further costs will be added to the investment. For purposes of this article, we are refraining from announcing the exciting pricing structures! Of course your bank may charge its own commissions on these transactions but thats unfortunately out of our purview.
Once you have selected, from the main page itself, ,what investment you wish to do, all you need to do is BUY or SELL!
Typically, our broker partner will email you a trade confirmation at the end of each trading day in which you have executed a trade.
Remember that a US brokerage account is typically protected by the Securities Investor Protection Corp. (SPIC) up to $500,000 (of which $250,000 is for cash) and we have tied up with one such very large international broker to facilitate all this.
Taxation:
There is no TDS (Tax Deduction at Source) for your stock market gains in the US. So when you make money and send it back to your Indian bank account, the broker in the US does not deduct any tax on it. You will have to pay Short-term Capital Gains Tax OR Long-term Capital Gains Tax in India, whatever is applicable. Short-term Capital Gains apply if a security is held for less than 24 months.
However, a 25% TDS applies only on your dividend earnings. This is when stocks in your portfolio give out dividends to their investors.
But since the US and India have a Double Taxation Avoidance Agreement (DTAA, it means that you pay tax only once. For the TDS done on your dividend earnings, you will get W-8BEN form from our international broking partner which you can use while filing your taxes in India to show that you have already paid taxes on this income. W-8BEN can be issued whenever you request.
Our Recommendation:
We believe most investors would do well to diversify away about 10%-20% if their investments into international baskets of growth stocks / ETFs to hedge not only against a 5% annualised currency risk but also to embed future opportunities in the portfolios.
Our international investing portal will also be sending you regular investing research and articles to keep you updated on what our partner’s analysts think. Of course, you will have your own views on asset classes and the closest proxies to those themes.
Apart from that, now your family will have to be bought another TV set as international business channels may well be on late into the night! Be forewarned as the investing opportunities just got more exciting!
Of course, you may invest in international markets via mutual funds (Read our previous blog at https://www.plindia.com/blog/international-mutual-funds-have-you-diversified/) so do please remain in touch with us at wms@plindia.com for updates on this and more!