By Sunil K. Parameswaran
Today is the era of the Global Indian. And this is also true from the point of view of security investments. An Indian investor asks, if the principle is that all his eggs should not be in the same basket, then why stipulate that the basket is only domestic. As an investor, we have various opportunities to invest abroad. Many mutual fund companies offer feeder funds.
We can invest in these in rupees, and the funds are spread across a global portfolio. However, these can be more expensive from a fund management fee perspective, compared to funds that invest in a global index. In India, there are funds available that invest in the S&P 500 and NASDAQ indices.
A risk averse investor may not want exposure to US equities alone. Thus, a globally diversified fund would give them a more diversified exposure. Such funds are now available, which invest in European and Southeast Asian markets, in addition to the US market. We must not forget that currency risk is an element that impacts global investments.
Thus, investing in securities across geographies can reduce exposure to currency risk. Indeed, it is unlikely that all currencies will appreciate or depreciate at the same time.
The Indian rupee has steadily depreciated over the years. Thus, it adds an extra dimension to the returns on global assets. For example, suppose you bought an American security for $ 70 when the exchange rate was Rs 70 to the dollar. Now, let’s say after a year the price in the US is $ 77, that is, the stock has appreciated by 10%. However, in the meantime, the exchange rate has risen to 75 rupees to the dollar. So if we were to sell the foreign title now, we would get 5,775 rupees. Considering that the investment was 4,900 rupees, the rate of return is approximately 17.86% for an Indian investor.
Funds geared towards the United States
Many companies outside of the United States list Certificates of Deposit or ADRs on the NYSE and NASDAQ. So, if an Indian invests in a US-oriented fund, there is a good chance that some of these securities will be part of the basket. Indians can also open a foreign brokerage account to invest directly in US securities and ADRs listed in the US. It should be emphasized that the mode of investment should be reasonably large, as banks charge a fee for converting rupees into dollars. US brokers also allow investors to acquire fractional shares.
More cautious investors can invest in foreign debt securities. However, in most countries, debt is primarily traded over-the-counter, and publicly traded debt securities are not always actively traded. Similar to an American Depository Receipt (ADR), is an American Depository Debenture (ADD). These are listed securities backed by foreign debt securities, unlike ADRs which are backed by foreign equity securities. Unlike India, where we use the words bonds and debentures interchangeably, in the United States the word debenture is specific to an unsecured debt obligation. Guaranteed fixed income securities are called bonds.
Investors should keep proper records of their investments. Indian tax authorities are said to require periodic details. If an investor were to earn dividends and other income in excess of a specified limit, they may also have to file U.S. income tax returns.
The author is CEO of Tarheel Consultancy Services