Investing in foreign stocks has been picking up a lot lately. Many of the mutual fund houses are building up portfolios with foreign stocks infused. A separate category of International Funds has emerged and focuses entirely on investing offshore. For individuals in the corporate world, it may not be a new flavor. Multi-national companies provide RSUs (Restricted Stock Units) that are investments into the stock held in some foreign exchange. A lot is happening in this area of investing. So let me touch upon various aspects of foreign stock investing that could serve as a starting guide for those interested in testing the waters. I will focus on the US equity market only since my knowledge is limited to that geography as of today.
First things first, why should one consider this as an investing option?
India has an economic and investment growth story, but when it comes to a sizeable mature investing market, the US is still way ahead. This fact cannot be ignored, and not entirely get blinded by the growth story here. There are risks everywhere, and the Indian market is in fact lot more volatile. The real game players are the Foreign Institutional Investors (FIIs) who dictate the stock movements. US markets hence remain a viable hedge against these volatilities.
Though the equity market rise gets choked by the high-interest rate movements by the US Fed (who govern the monetary policies), especially for the anti-inflationary measures, time and time we have seen the Fed resorting to quantitative easing (a fancy term to infuse liquidity into the market by printing more money, and/or lowering interest rates). This is a cycle that keeps playing over the years and provides opportunities for good equity investment appreciation.
One cannot ignore the dollar term appreciation that will directly benefit the remittance of INR money invested. The chart below is self-explanatory to bring home the point!
Finally, some great businesses are thriving which generates tremendous value for the shareholders. Think of the penetration of Tech across all industries, EV for example, the Cloud Business, or the advent of the AI wave. These are game changers for the long term.
Where and how to invest ?
To the degree I’m familiar with the Indian equity market, I do not have that level of knowledge across the broader US market sectors. I am neither familiar with the US consumerism patterns. So I go primarily for the indices that provide a cushioning against specific stock volatility. S&P 500 and NASDAQ are 2 prominent indices that one can consider. One can imagine the S&P 500 to be more like NIFTY 50 but has a much broader reach (across 500 companies). Having said that, it is a lot heavy on 7 stocks (like APPL, MSFT, GOOG, META, TSLA …) comprising more than 50% of the index. NASDAQ is an even more tech-heavy index, so it is effectively a Technology Sector index as I see it.
Various investing channels allow for direct or indirect foreign stock investments. The simplest form is the International Mutual Fund route. Many fund houses are joining this bandwagon. The fund either does a direct stock investment or serves as a proxy to invest in some foreign-managed fund. Some funds / ETFs invest in the S&P 500 (and some variations on it, like the Top 50 of an index, such as Mirae Asset S&P 500 Top 50 ETF), and NASDAQ. So those could be good options for new investors venturing here. In addition to International Mutual Funds, FlexiCap funds too have limited exposure to foreign stocks. For example, Parag Parikh Flexicap Fund has stocks like MSFT, GOOG, META, and AMZN comprising 10-20% of its portfolio.
A slightly more involved route is direct stock investment via a proxy online brokerage channel. Broker houses like Stockal, Vested and INDmoney serve as a platform for redirecting your foreign stock investment through another US brokerage firm. Once you are done with the one-time setup, the recurring process is relatively lightweight. Each time, you need to wire transfer your amount to a foreign brokerage account linked to your domestic broker house.
The most significant point you need to be mindful of is the LRS (Liberalised Remittance Scheme) limit which puts a remittance cap and taxation on the fund an Indian citizen can send outside of the country. The recent changes in the Tax laws have even constrained the non-taxable remittance to under INR 7,00,000 per year only for investment purposes. Any investments done above it will be taxed right away, at 20% remittance tax (up from the earlier 5%). This seems a crazy number and does not make any sense, since just to break even your investment you need to have a stock appreciation of 25% in your investment! If the math isn’t obvious, say for the scenario where you have already exceeded the INR 7,00,000 limit, and you are investing an additional INR 100. INR 20 is taxed immediately as part of the wire transfer to the foreign brokerage account. So you are left with INR 80 for actual investing, and for that to even give you back INR 100, it needs to appreciate by 25%. And in all this, we have not even accounted for the foreign exchange rate conversation charges.
Finally, as I mentioned earlier above, RSUs provided by multinational corporations that are listed in foreign stock exchanges are foreign investments by definition.
Do not forget the taxation
Things get quite interesting here. Foreign stocks are considered as unlisted shares in our taxation system, and thus the differences. The definitions of LTCG and STCG and rates of taxation are different for foreign investments compared to what you have learned for domestic equities. Long-term is considered 2 years or more, so do not get this wrong! LTCG is taxed at 20% (with indexation benefit), while STCG is at the income slab rate. Dividend incomes from the invested equities are taxed at the income slab tax rate.
International Mutual Funds are worse off when it comes to tax implications. The capital gains are directly taxed at your income tax slab. It might sound surprising why there is differentiation between these foreign stock exposure mutual funds, and direct foreign stocks, but that’s way it is surprisingly!
Countries like the US have a taxation treaty with India, namely DTAA (Double Taxation Avoidance Agreement) which avoids paying dual tax once in the US, and then in India for the same gains. One needs to fill in the W8-BEN form which is provided by your investment brokerage firm.
Corporate employees also need to be aware of the implications of RSUs on their overall taxable income. RSU incomes are added to the regular base pay and this at times could cross the tax slab limits and hike the marginal tax rate. You usually get this surprise towards the end of the financial year when the RSU accumulated over here would play in. There is barely any tax relief provided on the capital gains. The only available avenue for Indian investors is Section 54F of Income Tax Act wherein one can reinvest the capital gains on real estate within a specific time duration to receive exemption. There are ton of clauses in this though! For example, if one is already owning more than one residential property, then this exemption on a new property cannot be availed. The article here lists out many of those nuances.
For income tax return filing, one needs to submit the 1042-S form provided by the US IRS department that will show the tax implications from capital gains/losses and dividend incomes.
Setting expectations
There is some amount of expectation resetting required for foreign equity investing. Indices like the S&P 500 provide decent returns over the long term but do not hold consistently higher double-digit returns. Here is a pattern from last 5 years of S&P 500.
Direct stock investing is a different play altogether. The near-term expectations need to match the stock beta which is a measure of stock volatility whereas the long-term is always a factor in how good the business is.
As I’ve reiterated multiple times in the past, diversification is key to more rational investing. Foreign equities serve, in my opinion, another avenue to spread your money. But as always, do your further research and make an informed choice.
