Sunday, September 7, 2008

How to invest in stocks abroad - Money & You (The Sunday ET)

Diversify your portfolio and include more asset classes. Haven’t you heard this ad nauseum from your broker as he explains the virtues of financial planning. Ask 35-year-old Pankaj Trivedi, who recognised the wisdom in those words, but couldn’t get over the sense of ennui which gripped him in a depressed market scenario. But when his planner suggested him to invest abroad, Trivedi pushed away the negative sentiments like the US sub-prime crisis and jumped at the chance of investing in stocks abroad. While the thought of owning something abroad excited him, somewhere in his mind there were doubts about how he was going to be able to take the plunge, given his minimal knowledge and the situation abroad. To bridge the gap between making plans and fulfilling them, SundayET fills you with the things you need to know before investing in stock abroad.

FIRST THINGS FIRST

“Under the present RBI regulation, the maximum amount a person can remit overseas is $2,00,000,” says Sudip Bandyopadhyay, CEO, Reliance Money. And this amount is all-inclusive. So if you have a child studying abroad, you investible amount will be what remains after deducting all the money you send to your child. Once you finalise the amount you have dedicated to invest abroad, you need to choose your mode of investment.

RELOCATING YOUR MONEY

There are three possible routes that you could follow. If you passionately follow stock movement — even in the international market — then you may want to invest directly in the market. But you first need to be in touch with a broker who is registered to trade in the market of your choice. To make this process easier, there are service providers such as Reliance Money and ICICI Direct which facilitate the process of getting in touch with a broker in your chosen country. “They help in remitting funds from your local account to an overseas trading account that is linked to the brokerage/ clearing firms,” says Vishal Gulechha, senior vice-president, equity product group, ICICIdirect.com.

The bank in India may require you to fill Form A2 and keep a letter of remittance in addition to authorisation and declaration forms. Money wired to your overseas account will generally reach the overseas account in 24-72 hours and then you are free to use your funds to buy whatever you want. However, “investors should remember that while the choice of investing directly does exist as an option, it is an extremely risky proposition given the fact that you are trading in an alien market, ” says Rajiv Shastri, head, business development and strategic initiatives, Lotus AMC.

MUTUAL FUND ROUTE

For those who are not conversant with the movement and fluctuations of the international market, it makes much more sense to approach a mutual fund house to help you make your decisions, especially as they generally have off-shore fund managers or a dedicated team which is clued into the international market scene. There are many funds which invest in stocks abroad and you should check if they are in line with your risk-return positioning.

Many of these funds may, however, not be investing entirely in stocks abroad. Many of the funds invest 65% in the domestic market (to be able to avail of tax benefits) and the remaining 35% abroad. If you’re investing in such funds, then take a look at their domestic investment pattern.

“However, if you are investing in funds which invest 100% in stocks abroad, you will not be able to avail of tax benefits. If you have reconciled yourself with this fact, then check whether the investment style of the fund sounds plausible,” says Shastri. The third option also works along the mutual fund route and is available in the form of fund in funds. These mutual funds further invest in funds, which invest in the overseas stock market.

REASON IT OUT

The logic behind venturing abroad is simple. “It protects the value of your capital by spreading risks across economies and reducing potential downside by not focusing on only one particular geographical and economic market,” says Gulechha. “But you need to ask yourself if you want diversify abroad to seek stability when many others are looking at markets like India for stability,” reminds Shastri. However, it is entirely up to you to decide whether you are ready to take the risk or not. In terms of returns, nothing can be predicted with surety and will vary with the market and the time frame that you are looking at.

LOCATION HUNTING

Emerging markets such as those in Brazil, Russia and China seem to be attractive prospects but they also come with additional risks. “The target should be to be get the benefits of diversification and reduce the volatility of investments,” says Gulechha. And while this may seem ironical, given all those warnings about US sub-prime crisis and so on, many analysts still recommend the US markets on the basis of depth, liquidity, historical returns, stability and market capitalisation. According to Bandopadhyay, “One could also invest in select commodity stocks as the commodity sector has been doing well in the past couple of years.”

IS THIS FOR YOU?

This may sound like a setback , given the enthusiasm that many are showing in investing abroad. However, financial planners caution that investing abroad may not the best deal for every type of investor. “International investments are generally recommended for very evolved investors. This is also advisable for HNIs who want to diversify their portfolio,” says Bandopadhyay. Explaining this, Shastri says, “the retail investor in India does not have enough exposure to equities in the domestic market and he is repeatedly encouraged to do this before looking at overseas markets, thus making international investments often look like HNI products.”

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