Are you one of those who not only dreams of foreign vacations but is also itching to capitalise on opportunities in overseas markets? Or are you one of those that believe that foreign investments can help you reach optimal portfolio diversification? Or wants to create a small exposure to foreign stocks. If you are any of these, then there are a few things you must understand about buying stocks overseas before your portfolio sets sail.
The Liberalised Remittance Scheme (LRS) – In 2004 Reserve bank of India (RBI) opened up a window called Liberalised Remittance Scheme (LRS). This scheme allows Indian individuals to freely remit $2,50,000 overseas every financial year. This means that as per the RBI notification, an Indian resident individual can invest upto $2,50,000 overseas per financial year. With the current exchange rate of Rs 71 per dollar, an individual resident can freely invest upto Rs 1.8 crore overseas in a financial year.
Charges can be high – When you choose to invest in overseas stocks, then the expenses related to the investment eg. Transaction costs, brokerage etc will also likely be in the foreign currency. Once converted to rupee, these costs could seem a lot higher than what you would pay your local broker for a domestic transaction. Additionally, the annual/monthly maintenance charges may also be higher compared to domestic accounts.
Currency risk – An investment is foreign stocks introduces an additional risk to the portfolio. This is the currency risk which stems from a negative impact on investment value due to an adverse currency movement. Profits generated from foreign investments are subject to currency exchange rates. Let us take an example of investment in US stocks. At the current exchange rate the value of 1 dollar of investment is Rs 70. Assume that over a period of a year, the rupee strengthens against the dollar to trade at Rs 65 per dollar. Now at the end of the year, the value of your 1 dollar of investment has fallen down to Rs 65, which means it has depreciated by 7 per cent. Assuming that the investment generated a return of 5 per cent during the year, you would have still made a loss of 2 per cent due to adverse currency movement.
Global risks – When investing overseas, you are exposing your portfolio to a host of factors that might have otherwise have had no impact on your portfolio returns. However, it is important to note that at the same time you are hedging your portfolio from adverse domestic developments as well.
Give your portfolio a foreign flavour. However, be fully cognisant of the relative risks and benefits.