If you are a stock market investor then you should always look to diversify your investments into different categories to get maximum benefits. One such investment option is to invest in foreign stocks from India. In this article, we will look at How to Invest in Foreign Stocks from India, Taxes involved, Rules and Regulations.
Although it’s quite a new approach for many and investing in international stocks from India is not a simple process It’s gaining popularity recently. With technological advancements, it’s becoming easy for Indians to start investing in international stocks.
When talking about international stocks, US stocks stand out as the first choice amongst investors because of obvious reasons. Since the time the FAANG -Facebook, Amazon, Apple, Netflix, and Alphabet (formerly known as Google) stocks have gotten all the attention that they deserved, everyone is trying to rush into buying these kinds of stocks.
Why should you Invest in International Stocks?
The currency factor
The most important reason to invest in international stock is currency.
Source – xe.com
If you look at the USD-INR chart. The Indian rupee has depreciated almost 100% in a decade. INR was around Rs 40 in 2010 and it is near Rs 80 in 2020.
So if you bought 1 dollar in 2010 your money would have doubled in rupees terms by just keeping it in your bank account!
This is the biggest influencer as to why you should invest in international stocks, especially in US stocks.
Source – investing.com
Here is the NIFTY chart in USD terms. If you look at the chart. NIFTY did excellently well from 2000 till 2007 but NIFTY is below the high it made in USD terms in 2007 in 2020! So your investments in rupees may be growing but it has less value in dollar terms!
If you look at NASDAQ index returns in the last 20 years. The index has given 3 times returns in 20 years in USD value. So if you are an Indian investor then you have times the returns in your USD investments so if you convert that to Indian rupees you get additional currency depreciation returns as well!
Invest in the Fastest-Growing Companies Around the World
When it comes to investing in stocks in India, you are limited to the stocks listed in India. Although there are many good companies, not many companies have an impact internationally.
If you compare them to stocks like Amazon, Google, Microsoft, Facebook, etc. their product impacts everyone around the world! You should be looking to invest in companies that will dominate the digital world of the future.
Remember – The rate at which the business models around the world are changing there will be very few companies that will be surviving the vast change in tech.
How to Invest in Foreign Stocks from India?
There are mainly 2 ways you can buy international stocks from India
- Buy direct equity/ETFs
- Buy Indian mutual funds which invest in international stocks/ETFs
Buy direct international equity/ETFs
Many domestic brokers are having tie-ups with foreign brokerages houses which include :
- HDFC Securities Ltd is having a Tie-up with Stockal, New York
- ICICI Direct Securities and Axis Securities have Tie-up with Saxo Bank, Denmark
What is the Cost associated with Buying International Equity/ETFs?
There are 2 types of costs incurred while investing in foreign stocks :
- Transaction Cost
- Exchange Rate Cost (Currency Conversion Ratio)
It depends on the amount of investment. Here, brokerages fix the cost for different countries.
The minimum transaction cost is up to $15 i.e. in INR terms around Rs.1000 per transaction. While a Maximum of up to $50 means Rs.3,500 trade cost will incur. So, the amount of investment matters a lot because the transaction cost is linked with the amount invested.
Exchange Rate Cost (Currency Conversion Ratio)
When an Indian investor intends to invest in international stocks, he/she will invest in Rupees. While the brokerage houses will invest in those stocks in the respective currency of that stock.
Thus, these banks/brokerage houses will charge you an exchange rate cost, popularly known as Currency Conversion Ratio, for converting the Rupee into Foreign Currency. So, brokers will charge you about a 1-2% currency conversion rate while buying as well as selling the international stocks.
Buy an Indian Mutual Fund that Invests in Foreign Stocks/ETFs
Below are some mutual funds which invest in US equities and ETF
|Fund||Net Assets (Cr)||Expense ratio||Min SIP Investment||3 MO (%)||6 MO (%)||1 YR (%)||3 YR (%)||5 YR (%)|
|Franklin India Feeder – Franklin U S Opportunities Fund Growth||₹1,515||0.61%||500||35.7||22.1||33.6||22.9||15|
|ICICI Prudential US Bluechip Equity Fund Growth||₹587||1.69%||100||18.7||2.5||21.5||15.8||12.7|
|Nippon India US Equity Opportunities Fund Growth||₹122||2.74%||100||25.6||5.7||18.5||17||–|
|DSP BlackRock US Flexible Equity Fund Growth||₹260||1.8%||500||29||1.3||14.6||12.7||10.3|
|DSP BlackRock Global Allocation Fund Growth||₹29||2.09%||500||17.3||5.6||14||8.3||5.7|
|Sundaram Global Advantage Fund Growth||₹37||1.77%||100||18||3.1||11.3||7.3||5|
|Aditya Birla Sun Life International Equity Fund – Plan A Growth||₹76||1.88%||1,000||20.4||-0.9||11.1||12.1||6.3|
The above mutual funds are investing money in US stocks/MFs. So If you don’t want to take the pain of going through the hassle of creating an account with a foreign broker and having to pay the currency exchange cost and transaction cost. You can look at above MFs as an alternate option.
Buy an Indian Mutual Fund which Invests in Indian Equities as well as Foreign Stocks/ETFs
One of the other options is to look at mutual funds which invest in Indian equity and foreign equity mix. In this Parag Parikh Long Term Equity Fund stands out. Below is the composition of their fund as of May 2020.
Their foreign portfolio holding in the fund is around 26.42% of the AUM
Pros and Cons of Investing in Foreign/International Stock via Indian Mutual Funds:
- Hassle-free, easy-to-buy mutual funds
- No need to set up any other account other than the MF account.
- Ease of selling.
- Tracking performance.
- Higher expense ratio compared to normal equity mutual funds.
- Exit load if the mutual fund is sold within 1 year of investments.
How Much Maximum Amount one can Invest?
If you want to directly invest in foreign stocks then-
Indian investors are allowed to invest up to $2.5 Lakh per annum in international stocks under the Reserve Bank of India’s (RBI) Liberalised Remittance Scheme (LRS). For RBI’s master direction about the LRS scheme, please refer to: Liberalised Remittance Scheme
Assuming the Exchange Rate: $1 = Rs.80, the Maximum amount that can be invested is Rs.2 Cr per annum
Capital gains made through foreign stocks and funds are taxed in the same manner as debt mutual funds in India.
So broadly there are 2 types of taxation:-
- Short-term Capital Gains
- Long-term Capital Gains
Short-term Capital Gains
Gains within a 3-year holding period are treated as short-term and are taxed at your slab rate. Thus, short-term capital gains will get added to your total gross income and its taxation will be according to your tax slab.
Long-term Capital Gains
Gains after a 3-year holding period are treated as long-term and are taxed at 20%, with the benefit of indexation.
- What is Indexation Benefit?
- You can add the inflation cost for 3 years to your cost of acquisition.
- For example, You have invested Rs.100 and you got capital gains of Rs.30 after 3 years. For these 3 years, there was an inflation of 6%.
- Thus, according to the Indexation benefit, you can add this inflation cost for 3 years (6+6+6) = Rs.18 to your original cost (Rs.100). So, at the end of 3 years, your cost of acquisition of the investment will become Rs.118 (Rs.100 + Rs.18)
- Here, Taxable Capital Gains will be Rs.12 (Rs.130 – Rs.118). That is you have to pay tax on Rs.18 and not Rs.30 as a result of Indexation benefit.
- Dividends are taxed at your slab rate. But if tax is deducted at source, you can claim benefit under the Double Taxation Avoidance Agreement (DTAAs) between India and the deductor country.
- You should remember to disclose the value of your foreign assets and income each year in Schedule FA of your income tax return.
How to Invest in Foreign Stocks from India – Final Thoughts!
Although India is an excellent emerging market and stocks in India do excellently well over time the biggest challenge that we have investing in India is- the Indian rupee depreciates consistently over the years to make India a good export HUB.
Like it or not the Indian rupee will have to depreciate in the future as well to remain competitive in the global export market.
Also, the biggest innovation has also been driven by US companies in the past starting from the Industrial Revolution to the tech revolution recently. US companies continue to lead the innovation and create path-breaking products which are used at a global scale.
with those things in mind, it is essential to invest in US companies for your portfolio to remain competitive.
With the data available until now, we highly recommend you look at opportunities to invest in US equities either directly via stocks or Indian mutual funds.
Disclaimer – please consult your financial advisor before making any investment decisions.
FAQs on How to Invest in Foreign Stocks from India
Can we invest in foreign stock markets from India?
Yes, you can invest in foreign stocks from India in 2 ways: 1. Buy foreign stocks/ ETFs via a broker like HDFC Securities, ICICI Securities, etc. 2. Invest in Indian mutual funds that invest in foreign stocks/ETFs.
What is the best way to invest in international stocks?
The best way to invest in international stocks from India is via mutual funds which invest in international stocks/ETFs just because of the fact that they are easy to manage and take out all the hassles of paying hefty fees.
Can I invest in US stocks like Apple, Google, Microsoft, Facebook, Netflix, Tesla from India?
Yes. You can buy Apple, Google, Microsoft, Facebook, and Tesla stocks from India by creating an account with a foreign broker with the help of Indian broking companies like HDFC Securities, ICICI Direct, etc.
How Tax is Calculated for the Investments Made in Foreign Stocks from India?
The investment made in foreign stocks from India is considered a debt investment and treated as part of a Debt mutual fund investment.
What is the benefit of investing in US stocks from India?
The biggest benefit is to take advantage of the falling rupee against the dollar. The Indian rupee has fallen 100% against the USD in the last decade. So even if the US stock market didn’t give any returns(hypothetically) then your money would have doubled in rupee terms in the last decade.