Beyond Indian Equities

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Its getting pretty hot out here ! . You would agree that our stock markets have caught the fancy of the entire globe . Every fund worth its name wants to increase allocations to our country. The results are showing, with equity valuations going into expensive territory. For value investors, these are difficult times. What does one do with funds allocated towards equities in such times ?. While parking money in debt investments is never a bad idea , another option is to look for value in equities other than in India . We are speaking about international equity investments.


Post the 2008 correction, the current rally hasn’t been uniform across international markets . India has infact been one of the best performers in the ongoing rally while markets like China are still far away from the peak levels of 2007. Both developed and emerging markets would have a range of stocks that could be available at much better valuations than their Indian counterparts. For example - just like you have Indian companies with global businesses, there are foreign companies that are listed in developed countries, but derive a large chunk of their revenues from emerging markets . Recession in their countries of origin has had little impact on profitability of such companies due to their global roots .Due a overall correction in developed markets these stocks have seen valuations come down dramatically . In some cases such undeserved fall in stock valuations can actually open up opportunities for value investors . Clearly there is a need to look beyond listed Indian securities .


RBI permits resident Indians to make a maximum of $200000 (approximately 1 crore in Indian rupee terms ) worth of investments overseas per year . You can buy equity directly from a foreign stock market, or buy mutual funds, insurance policies, commodities, foreign currency and even real estate. As an Indian investor this opens up the possibility of diversifying risk and looking at value opportunities across the globe.

So how does one go about making international equity investments? You can buy securities on international bourses through brokers who offer these services in India. Indian service providers have tie-ups with international equity, commodity and currency brokers, who allow you to use their platform for trading. You remit the money to your account with them by filling up Form A2 and the money is wire transferred in a day or two. Once it's there, you can use it to invest in stocks, commodities, indices, derivatives or currency

However this method of investing has its share of risks. Losses due to currency fluctuations are real. If you are a long term investor then predicting long term currency risks could be tough. Secondly remittance processes are not as simple as it appears on paper . Thirdly you still do need comprehensive information, which may or may not be easily available, to make investment decisions. You will need to put in a good amount of study to understand product dynamics before committing funds. Fourthly international equity investments are not subject to the same tax laws as equity investments in India . Short term capital gains are taxed at the highest marginal rate of tax applicable to you while long term gains are taxed at 20 % with indexation benefits . The long term period in this case being three years .Dividends are also fully taxable. You may also have to pay taxes in the country in which you have made the gain. Fifthly transaction costs due to bank and brokerage charges are pretty high. . Besides all this investors must be able to conduct due diligence in various countries before they consider direct investments. Many may be better off with letting fund managers handle the complexities of investing.

Thankfully there are couple of other interesting, simpler and cost and tax effective methods for investing in international equities. There are several international funds launched by Asset Management companies in India and there is the Indian Depository Receipt. More about these in later articles.

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