How To Invest in Foreign Stocks From India in 2024

The previous chapter taught you how to build, monitor and rebalance your portfolio. You also went through a few portfolio-building strategies. In this chapter, you will learn how to invest in foreign stocks, their risks and their tax implications. So if you have ever thought that having tech giants like Google, Apple, Amazon, etc. in your portfolio would be a great idea, this is the place to understand how to do it. 

In an increasingly interconnected world, investing in overseas financial markets has become key for investors to diversify portfolios and tap into global growth trends. Indian investors too, are now looking to allocate a portion of their savings into foreign stocks to mitigate concentration risk and benefit from wider opportunities.  

However, cross-border investments also have their own dynamics in terms of regulatory guidelines, taxation frameworks and reporting compliances. This definitive guide aims to equip Indian residents with a strong understanding of all key aspects involved in overseas equity investing.

Ideal Foreign Markets for Equity Investments

United States of America

• The world’s largest economy is home to 50% of global stock market capitalisation. 
• Unparalleled listed universe across almost every sector and diverse market capitalisations.
• Steady economic growth despite periodic slowdowns.
• Top global companies leading innovation across technology, healthcare, and consumer sectors.  

China  

• 2nd largest global economy is forecast to overtake the USA soon.  
• Home to world-beating technology and internet enterprises.  
• Expanding consumption theme as household incomes rise.  
• Major manufacturing and export hub across verticals from electronics to textiles. 

Europe

• Companies like Nestle and LVMH lead globally across FMCG, and luxury retail, respectively.
• Switzerland and Germany are known for precision manufacturing leadership.   
• Scandinavia is home to sustainable technologies and digital infrastructure innovators.  

Emerging Markets 

• Markets like Brazil, Russia, South Africa, Taiwan, etc., have high growth potential.
• Attractive demographics, rising disposable incomes, urbanisation drivers.
• Gradual maturation of banking/financial services, healthcare and allied sectors.  

Hence, investors have a wide canvas to select appealing foreign stocks aligned with their preferences from major global economic groupings offering diversity.  

Ideal Investment Instruments for Overseas Exposure 

Here are some of the popular routes Indian investors can consider for participating in foreign equities:

International Mutual Funds 

• The simplest way to start is with modest sums like ₹5,000 per month via SIPs.  
• Broad exposure across geographies, market capitalisations and sectors.
• Index funds, thematic sector funds across technology, EVs, biotech, etc.  

US Listed Stocks  

• Direct option to design and own a global portfolio of selectively handpicked stocks.  
• Platforms like Vested, and Winvesta facilitate opening accounts online and managing investments.
• We need larger ticket sizes and an understanding of foreign companies.  

Exchange Traded Funds

• Listed on Indian bourses, can be purchased like domestic stocks.
• Low-cost access to foreign indices across the USA, Asia, Europe, etc.  
• Liquid; can be sold anytime on exchange during trading hours.

GIFT City Platforms  

• International financial centres are being developed like Gujarat IFSC.
• Local brokers offer a route for overseas access while being based in India.  
• Early stages but have the potential for wider future scope.

Each of these has its pros and cons in terms of enabling convenient access, liquidity, geographic breadth, compliance and costs. Hence, portfolio needs should steer the right instrument selection.

Building a Customised Foreign Equity Allocation

While target allocation to foreign stocks may vary across investors, adopting a tailored approach allows for efficiently harnessing their diversification potential:  

• Setting an Ideal Range

As a rule of thumb, 15-30% of total equity exposure can be a healthy initial offshore allocation but should ultimately be guided by risk profile.  

• Aligning Instrument Mix with Requirements

Choosing between ETFs, index funds, specialty sector funds, etc. should depend on preferred market exposure, costs and liquidity needs.

• Rebalancing to Maintain the Target Weighs 

Periodic portfolio reviews and rebalancing are necessary to hold offshore investment levels at predetermined strategic targets, offsetting deviations.  

• Tax Optimisation 

Placement decisions should consider tax liability in India and overseas jurisdictions to prevent the incurrence of avoidable incidence twice.

• Compliance Management 

Avoiding penalties by ensuring diligent compliance across LRS, taxation and disclosure requirements through the investment lifecycle.

By adopting these customised policy initiatives, India-based investors can efficiently harness overseas equity segments to enhance overall portfolio resilience and long-run returns.

Managing Risks Associated with Offshore Investing

While allocating savings to foreign stocks has merits, investors also need to be cognizant of attendant risks:

• Home Country Bias 

Insufficient global orientation and familiarity with foreign cultures or languages may hinder gaining perspective on overseas investment decisions.

• Lack of Transparent Disclosures  

The unavailability of reliable data or corporate governance red flags may sometimes limit development-informed opinions on offshore companies.  

• Geopolitical Changes 

Shifts in political dispensations or global trade equations could significantly impact companies' prospects in a country.

• Currency Fluctuations  

A sharp decline in destination country fiat currency may dampen portfolio returns for Indian investors depending on entry/exit forex rates.  

By acknowledging these factors, investors can pursue appropriate risk management strategies like ensuring appropriate diversification across major currency zones, and closely tracking geo-political developments and macro-economic policies in key offshore markets, among other prudential norms, to optimise reward propositions. 

Now that you know what foreign investments entail, let us look at some key factors and regulations that you need to know before making foreign investments.

Liberalized Remittance Scheme 

The Liberalised Remittance Scheme (LRS) lays down the fundamental regulations governing key avenues for outward remittances from India, including overseas investments. The LRS transaction cap is currently set at USD 2,50,000 per person in a financial year. 

Within this ceiling, resident individuals can undertake various kinds of activities like overseas education, medical treatment abroad, private visits or gifts as well as cross-border investments. The latter is categorised under two main heads:

1. Overseas Direct Investments (ODI): involving investment in foreign businesses, joint ventures, and wholly owned subsidiaries, among others.
2. Overseas Portfolio Investments (OPI): Investment in foreign securities across equities, mutual funds, ETFs etc.

The LRS ceiling applies to the aggregate remittances done for all such purposes in a year. Of this, the proportion available to make portfolio stock investments abroad would depend on an investor’s specific needs.

Updated Foreign Portfolio Investment Regulations  

Recently, in August 2022, India’s Government and RBI released revised guidelines aimed at streamlining rules governing overseas portfolio investments, especially regarding aspects like ceiling limits, allowed instruments and compliance needs. The key features are:   

• Investment in Listed Foreign Stocks Permitted  

Resident investors can invest in equity shares of offshore companies listed on recognised stock exchanges abroad, through different banks or other such financial intermediaries.  

• Similar Allowance for Listed Debt Instruments  

In addition to listed equities, resident Indians can purchase various kinds of listed overseas debt instruments like government securities, corporate bonds, etc., within the overall LRS ceiling.

• Foreign Mutual Funds and ETF Route  

Investment into mutual fund schemes and ETFs launched in international markets that largely invest in securities issued by foreign portfolio companies is also permitted.

• Special Exemptions in Certain Cases 

Certain OPIs through employee stock option plans, sweat equity or minimum qualification shares carry exemptions from LRS limits in specified cases subject to ensuring prescribed reporting norms.

• Removing Disclosures for Most OPIs

Importantly, the requirement for filing detailed disclosures around foreign portfolio assets held has also been done away with, in most cases, providing compliance relief to investors.

Evaluating the Investment Rationale for Foreign Stocks   

Here is a closer look at some of the factors that make a compelling case for adding foreign stocks to investment portfolios as part of the risk diversification strategy:

• Expanding the Growth Opportunity Pipeline

Investing in overseas equity provides the advantage of harnessing growth from many developed economies that still dominate globally across metrics like GDP, innovation intensity, corporate profitability metrics and investor wealth creation.  

• Benefitting from Emerging Market Growth Potential  

While outpacing mature Western economies could be challenging, fast-growing emerging markets still have immense headroom for generating outsized returns through the high GDP growth and rising income levels runway.  

• Capturing Nascent Mega Trends  

  Several cutting-edge sectors like electric vehicles, renewable energy, and advanced electronics are at a very early penetration level in India. On the other hand, foreign companies already enjoy huge leads in many similar spaces.

• Mitigating Concentration Risk  

Foreign securities provide valuable diversification along the lines of geographic risk, political climate, market cycles and currency movements – helping mitigate concentration risk for Indian investors with a home bias.   

• Portfolio Stability During Downturns 

Overseas investments tend to have a low correlation with domestic securities and hence, can potentially hedge Indian portfolios during periodic slowdowns or market corrections induced by local upheavals.

Approaches for Allocating to Foreign Stocks

Globally diversified portfolios are built most effectively by adopting structured approaches for carving out and maintaining foreign stock exposure:

• Core and Satellite 

This involves creating a low-cost index/ETF core portfolio providing broad coverage of major regions and supplementing with actively managed thematic satellite picks likely to outperform.

• A Blend of Active and Passive 

One can also blend low-cost index mutual funds or ETFs tracking global benchmarks along with selectively picked actively managed overseas equity funds to optimise costs.

• Systematic Investment Routes  

Employing periodic SIPs allows steadily accumulating exposure to offshore securities across market cycles and benefits from rupee cost averaging.

• A Mix of Direct and Indirect  

Investors can consider purchasing reputed foreign stocks in brands they closely follow while allocating to mutual funds/ETFs to enable wider sectoral and geographic participation. 

Taxation Guidelines for Overseas Investments 

Navigating cross-border tax norms and foreign exchange regulations also requires understanding for Indian investors eyeing global diversification:  

• Capital Gains Tax in India 

Equity shares held over 24 months qualify for flat 20% long-term capital gains tax, while shorter holdings get taxed as per applicable slab rates. Debt securities require 36 months of holding for the 20% LTCG rate. 

• Dividend Income Tax in India  

Dividends from foreign companies must be shown as ‘Income from Other Sources’ in tax returns and taxed as per the investor’s tax slab, similar to domestic dividends.

• Withholding Taxes in Foreign Jurisdiction

In addition, overseas jurisdictions may levy withholding taxes on income from Indian residents as per domestic tax codes applicable there to prevent double tax incidence. 

• Claiming Foreign Tax Credits 

Indian residents need to furnish documents and file tax returns accurately to claim Double Tax Avoidance Agreement (DTAA) benefits, ensuring taxation happens either in India or a foreign country but not both.

• Repatriation Needs on Liquidation 

When overseas investments like stocks or debt instruments are liquidated, the proceeds need to be mandatorily repatriated back to India within 60 days for re-deployment as per RBI stipulated guidelines.

• Repercussions of Non-Disclosures  

Significant penalties exist for Indian residents for not disclosing foreign assets and income in tax returns as mandated under law. Masking overseas investments also contravenes rules and hence, is best avoided.

Conclusion

For Indian investors, allocating a strategic portion of long-term savings to foreign equity markets has become vital from portfolio enhancement and risk-balancing perspectives in today’s integrated global economy. 

Following high governance standards, staying abreast of wider global developments and pursuing well-informed stock selection methodologies are fundamental to generating rewarding offshore returns. However, strict adherence to applicable regulatory and tax guidelines is equally crucial to avoid punitive actions.

By judiciously aligning all these elements, Indian residents can efficiently harness overseas stocks to achieve the dual benefits of driving portfolio returns and containing overall risk volatility.

With this, we hope you can make a successful investment portfolio and remain consistent with your investing strategy. Happy investing!