Smart investing: Know how you can invest in global equities

By Joydeep Sen

An investor can take exposure in international equities in two ways: the mutual fund route and buying the stocks directly at exchanges abroad. In mutual funds, there are multiple fund formats that offer you this exposure. There are fund of funds (FoFs) that invest your money abroad, say, USA or Europe or China or any part of the world.

You purchase and redeem in rupees (INR), the conversion to foreign exchange is taken care of by them. Then there are exchange traded funds (ETFs) which do the same thing, the difference being that units of ETFs are traded at the exchange (NSE/ BSE). You trade in INR, the way you trade in any equity stock, through a trading account with a stock broker.

Feeder funds

These funds, FoFs or ETFs, are known as feeder funds when they collect the money here in India and invest in a fund abroad, as they are feeding into another fund. A FoF or ETF may also buy stocks at exchanges abroad, ie, not feed into another fund.

What we discussed so far are fully global-focused funds, whereas there are other funds with a partial mandate for international exposure, where the majority of the portfolio is in India. The other method we mentioned earlier is purchase of equity stocks directly, for which funds may be remitted abroad, as per the Liberalised Remittance Scheme (LRS) guidelines, subject to a ceiling of $250,000 per financial year per person. There are online service providers, where you can open your account and execute the investments.

mutual fund route

Between the two avenues, mutual funds are more convenient. Everything is offered to you as a package, including research, stock selection, tracking, execution, etc. There is an expense charged for it, known as total expense ratio (TER). The returns you get, reflected in the NAV of the fund, is net of TER.

If you are doing it yourself, ie, buying foreign stocks by remitting funds abroad through LRS, you have to do it yourself. You have to identify stocks, locate a stock broker for the execution, and track the stocks. There may be readymade model portfolios available with the service provider, which you can replicate at the click of a button, but there would be fees charged for it. There is a limit of $250,000 per financial year, but for most people that is not an issue.

At a conversion rate of, say, Rs 75 per US dollar, it comes to Rs 1.87 crore per financial year. The limit impacts only those HNIs who have other expenses abroad, eg, child’s education. The positive aspect of DIY is, you save the annual expenses charged to a fund. Net-net, MF is a package, which is offered to you at a price, which is the TER. For that matter, broking services or other services you avail of, for buying stocks abroad, will have a fee.

Taxation aspect

Looking at the taxation aspect, FoFs are taxable as debt funds, even if the underlying investments are equity. For a straight fund (not a FoF), buying equity stocks—international funds are taxable as debt funds. For a straight fund investing the major component in Indian equity stocks and a minor component in stocks abroad, it is taxed as an equity fund, provided more than 65% is in Indian equity.

When you are buying stocks abroad directly, for tax purposes, these are treated as unlisted, not being listed in an exchange in India, eg, NSE or BSE. If you hold the stock for two years, it becomes long-term, where you pay tax at 20% plus surcharge and cess as applicable. For less than two years of holding, it will be treated as short-term capital gains, taxable at your marginal slab rate.

The writer is a corporate trainer and has authored books on wealth management.