If you are a sophisticated investor, you can also invest directly in specific stocks/ETFs. Of course, a special platform in the gift city of Gujarat is also being established to enable the transaction of international securities.
At present, mutual fund investments in foreign stocks are on hold due to the mutual fund industry reaching the $7 billion limit of the Securities and Exchange Board of India (Sebi) . However, this limit should be raised soon.
In this story, we focus on the options available to an investor through direct stock selection and how that compares to the mutual fund route.
Options available
Some Indian brokers/platforms have partnered with foreign brokers to facilitate direct investment in foreign markets for their users.
For example, ICICI Securities associated with Interactive Brokers LLC, a registered broker, regulated by the United States Securities and Exchange Commission (SEC).
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Fintech platforms in India such as Vested, Stockal and Groww also provide facilities for foreign investment.
Investors can also open an account directly with the overseas broker that provides services in India. In all cases, the account will be owned and maintained by the foreign broker.
Make sure the foreign broker is a member of the Securities Investor Protection Corporation (SIPC). In this case, your account will be insured as securities in your brokerage account.
These securities held in the account of a member of the SIPC are protected up to $500,000 in the event of the bankruptcy of the foreign broker.
The number of countries access is given depends on the broker/platform you choose.
For example, ICICI Securities allows investments in geographies such as the United States, United Kingdom, Germany, Japan, Singapore, and Hong Kong.
While Groww provides access mainly to US stocks.
When the amount is transferred from your Indian bank account to a foreign bank account, transfer fees will be applicable.
If you invest through an Indian broker, brokerage/commission charges will also be levied.
These fees vary depending on the subscription plan an investor purchases from the broker.
For example, ICICI Securities has three plans – Classic at zero cost, Global Select at ₹999 per year and Global Advantage at ₹9,999 per year. Brokerage fees for these plans for US trades are $2.75 per trade, $1.99 per trade, and no fees, respectively.
Most of these platforms also allow you to make fractional investments, which allows you to buy the fractional value of a stock, regardless of its price.
For example, you can buy a 0.1 “X” share for $300 (assuming the cost of one share is $3,000).
This allows an opportunity to participate and invest in stocks that are expensive and not affordable.
Additionally, many of these platforms also offer off-the-shelf portfolios, which would be supported/developed by investment advisors.
These are preconfigured baskets of stocks and exchange-traded funds (ETFs) that you can invest instantly.
HDFC Securities calls it “stacks,” which are brought in by overseas broker DriveWealth.
Say, EV Stack on the platform is an electric vehicle portfolio with long-term investments in companies developing electric vehicles, self-driving vehicles, battery packs and other electric vehicles.
Each pre-built portfolio has fees which are calculated as a percentage of the value of the investment and may also depend on the basic/premium subscription plan chosen with the broker.
AUM fees vary with each provider and are approximately between 1 and 3%.
MFs Vs direct route
Comparing mutual funds to direct equity investments overseas may not be an apple-to-apple comparison.
Direct investment through a broker falls under RBI’s Liberalized Remittance Scheme (LRS) which relates to remittances in foreign currencies (usually USD) made by Indian residents.
Under LRS, a resident is only allowed to invest up to $250,000 per year.
Mutual funds are not covered by these rules. “Investments in mutual funds with overseas investments remain domestic investments from the perspective of the Indian resident investor,” said Rishabh Shroff, Partner and Co-Head of Private Clients, Cyril Amarchand Mangaldas .
Second, the cost when investing through a mutual fund is compressed into a single ratio, which is the total expense ratio.
On the other hand, direct investing includes wire transfer fees on the transfer and installment (about 1-2%) and brokerage fees (up to $2) on each transaction.
In the latter case, banks can also deduct the tax collected at source (TCS) at 5% when the remittances total ₹7 lakh or more in a financial year.
Of course, this can later be used by the investor to offset their total tax liability for the tax year.
In terms of taxation, while investments through mutual funds are considered debt funds, investments through direct investments are considered unlisted shares for tax purposes.
In addition, in the latter case, the details of the financial assets purchased must be disclosed separately in the income tax return (ITR).
A pertinent point to note in the case of direct investment is that in the event of the unfortunate demise of the Indian investor, investments in foreign securities may incur inheritance tax while returning the sale proceeds to India.
Referring to investments in the United States, Kunal Savani, Partner, Cyril Amarchand Mangaldas said: “Generally, persons who are not US citizens are subject to inheritance tax on their US-based assets, which includes shares issued by US corporations. The threshold limit applicable for the calculation of inheritance tax is $60,000 subject to conditions.
He added: “Contrary to the above, investments through Indian MFs would most likely not be exposed to such inheritance taxes as the investments will be held by Indian mutual funds and not by individuals.”
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