While foreign brands like Amazon, Apple, Facebook, Google (Alphabet) and Uber have become some of the household names in India, many investors have been looking at these companies to invest their money to participate in their growth story.
However, international investing comes with a host of risks. Cafemutual approached Bangalore MFD Srikanth Matrubai and Suresh Sadagopan of Ladder7 Financial Advisories, Navi Mumbai to know things that investors must keep in mind before venturing into global economies. Here is what investors need to know about international investing.
- Medium to invest overseas
Investors can venture into global markets either through mutual funds or through the Liberalised Remittance Scheme (LRS).
Mutual funds primarily offer those funds that directly invest overseas, fund of funds, feeder funds and ETFs.
International mutual funds may be broadly classified into - Global funds that invest across various economies, country funds that invest in a particular foreign economy, global sector funds that invest in a particular sector across the globe and regional funds where the exposure is limited to a particular geographic region.
Investing through LRS requires a foreign brokerage account along with a designated bank account from where the transactions will be routed. Remittance under LRS is subject to a capping of USD 250,000 per financial year for current account transactions/capital account transactions/both. Also, investors may have bear charges like currency conversion to invest overseas. There is no such restriction in mutual funds route.
- The associated taxes
International funds are taxed like debt funds. Funds held for less than three years are subject to short-term capital gains tax at existing income tax slab rates. While funds held for more than three years are subject to long term capital gains tax at 20% after indexation. Suresh highlighted that indexation reduces the effective tax rate substantially.
Remittances above Rs.7 lakh in a financial year through LRS are subject to Tax Collected at Source (TCS) at 5%. Banks issue a tax certificate in this regards, which can be used for claiming the tax credit. Dividends and interest income are taxable at the applicable slab rates. Further, investors can claim foreign tax credit depending on the existing Double Tax Avoidance Agreement (DTAA).
- Expenses involved
Srikanth said that owing to the spread of fund management across geographies, international funds normally demand a higher expenses ratio over their domestic counterparts. However, he pointed out that the expense ratio must be evaluated along with other parameters like geographic diversification, return potential, etc.
Many international funds follow FoF structure which has two expense ratios – one for fund and another for underlying funds, pointed out Suresh.
Talking about the LRS medium, considering associated brokerage fees, transactions costs, etc. investing directly could be a costlier affair.
- Regulatory compliances
Banks must be reported on the receipt of money that was remitted through LRS. Investors must declare their foreign assets in the annual tax returns. Further, they must also ensure compliance with RBI and Foreign Exchange Management Act (FEMA) regulations.
Conclusion
Srikanth believes that international investing must be backed with detailed research and investors may start their journey through mutual funds. Further, he recommended opting for global funds and avoiding concentrated exposure in a particular sector or country.
Suresh feels that while retail investors should stick to mutual fund for international exposure, ultra HNIs may look at investing through the LRS medium along with international funds.
