Time to go global? Here are 4 options for investing in international markets now

To put things into perspective, if we consider the last five years (including 2022 YTD), US equity markets have outperformed Indian markets in 4 out of 5 years. The data is based on the performance of Morningstar country indices.

This brought out the benefits of diversifying across geographies, and consequently, there has been a steady increase in the number of Indians investing in international securities.

Catching on this trend, many Indian mutual fund houses partnered with international asset managers and launched feeder funds in India, which feed into funds chosen from the basket of international funds offered by their partners.

Six international funds were launched in 2020 and 23 in 2021, including ETFs and FoFs, launched on the same underlying international fund.

A sharp rise in AUM of international funds, driven by strong investor flows and solid global market performance from Q3 2020 onwards, prompted Sebi, the securities market regulator, to stop mutual funds from making further investments into foreign stocks beginning February 1, 2022, to avoid breach of industry-wide overseas limits.

The regulator specified overall MF industry limit for investments into overseas securities is $7 billion. There is a separate limit of $1 billion for funds investing in overseas ETFs.

Industry participants initially believed that the limits will be quickly enhanced, but that has not happened so far. In such a background, what are the means of investing in overseas markets? This article sheds some light on the different avenues still available to Indian investors.

Investments through international mutual funds:
At the time of this article going being published, Sebi had allowed mutual fund houses to accept subscriptions into international funds to the investment limit as of end-of-day 01 February 2022. This headroom has been created due to the sharp correction in equity markets globally and fund redemptions.

However, the headroom is limited by the overall industry-wide international investment limit of $7 billion. Investors may utilise this marginal opening up of international mutual funds.

Apart from this, an additional $1 billion limit for funds having international ETFs as their underlying. This limit is still available, and therefore investors can invest in funds that have international ETFs as their underlying funds.

However, given that there are very few funds in the market presently which invest in ETFs the opportunity here is quite limited.

Liberalised Remittance Scheme
The Liberalised Remittance Scheme is run by the Reserve

. It allows resident Indians to remit up to $250,000 per person per year to other countries, which can then be used for various expenditures like travel, medical treatment, tuition fees, and also for investment into equity/debt or property.

Families can, in fact, combine the LRS limits of different individuals in the family for larger investments. Guidance on LRS is available on the RBI website at the following (link: https://www.rbi.org.in/SCRIPTS/FAQView.aspx?Id=115 ).

LRS investments are for investors seeking to make investments in foreign currency-denominated assets for subsequent expenses, which will be in foreign currencies, as well as the creation of foreign assets. There are several ways nowadays to utilise the LRS facility:

Investments through IFSC entities:

India INX G
lobal Access and NSE IFSC are entities already in existence in IFSC in GIFT city Gujrat, which provide a platform for investing abroad. The instrument being traded here is called an “Unsponsored depository receipt” (DRs).

Each DR represents a fraction of one share in the company. Holding a certain predefined number of DRs entitles the investor to hold one share in a foreign company.

These DRs are, however, tradeable only on NSE IFSC, and the trade is denominated in US dollars. Currently, only 50 international stocks are permitted to be traded at NSE IFSC. All transactions on the exchange are facilitated by brokers, just like on the domestic stock exchanges. The settlement cycle is T+3 days.

India INX Global Access INXGA empanels multiple international brokers, such as Interactive Brokers, that facilitate investing overseas. Its platform provides a free-of-cost single integrated terminal and a mobile application through which you can invest directly in equities and ETFs traded over 135 exchanges across 33 countries in 23 currencies.

DIY solutions offered by foreign or domestic brokers:
An Indian investor can invest in international stocks or ETFs (listed instruments) through either a foreign broker or domestic brokers who have a tie-up with a foreign broker.

The overall process has been made easy by making most of the process online. The DIY nature of these offerings however is one reason why the average ticket size in these products is relatively lower.

In conclusion
The recent correction in global equity markets provides a wonderful opportunity to own international assets at attractive valuations.

Given the uncertainty around an increase in the industrywide limit of investment into international securities by mutual funds in the near term, especially now when the Indian Rupee is facing immense pressure against the US dollar, it is advisable to utilize the LRS route for the creation of foreign currency assets.

One must, however, be aware that the initial documentation etc. required for LRS investments is more than that required for investments through international mutual fund schemes.

One must also consider that the offerings which are DIY require complete

of the investor on his understanding of international markets, which is a daunting task.

There are a few services, however, which provide a portfolio solution to international investing, and in our opinion, those are the ones meant for long term investments into international markets.

(The author is Associate Director – Investment Products Management, Morningstar Investment Advisor Pvt Ltd)

(Disclaimer: Recommendations, suggestions, views and opinions given by the experts are their own. These do not represent the views of Economic Times)