By Sunil K. Parameswaran
Today is the age of the global Indian. And this is true from the standpoint of security investments as well. An Indian investor is asking, if the principle is that all of one’s eggs should not be in the same basket, then why stipulate that the basket be only domestic. As an investor we have various opportunities for investing abroad. Many mutual fund houses offer feeder funds.
We can invest in these in rupees, and the funds are allocated across a global portfolio. However, these can be costlier from a fund management fee standpoint, as compared to funds which invest in a global index. In India, there are funds available which invest in the S&P 500 and the NASDAQ indices.
A risk-averse investor may not want to expose themselves to only US stocks. Thus, a globally diversified fund would give them a more diversified exposure. Such funds are now available, which invest in the European, and South East Asian markets, in addition to the US market. It must be remembered that foreign exchange risk is an element that impacts global investments.
Thus, investing in securities across geographies, can reduce the exposure to currency risk. This is because all currencies are unlikely to appreciate or depreciate at the same time.
The Indian rupee has been steadily depreciating over the years. Thus, this adds an additional dimension to returns from global assets. For instance, assume you bought a US security at a price of 70 dollars, when the exchange rate was Rupees 70 per dollar. Now, say that after a year, the price in the US is 77 dollars, that is the security has appreciated by 10%. However, in the meantime the exchange rate has changed to Rupees 75 per dollar. So, if we were to sell the foreign security now we would get 5,775 Rupees. Considering that the investment was Rupees4,900, the rate of return is about 17.86% for an Indian investor.
Many companies from outside the US list depository receipts or ADRs on the NYSE and the NASDAQ. So, if an Indian were to invest in a US oriented fund, then chances are that some of these securities would be a part of the basket. People in India can also open a foreign brokerage account to invest directly in US securities and US listed ADRs. It should be pointed out that the investment mode should be reasonably large, because the banks charge a fee for converting rupees to dollars. The US brokers also allow investors to acquire fractional shares.
More conservative investors can invest in overseas debt securities. However, in most countries, debt primarily trades OTC, and exchange listed debt securities are not always actively traded. Analogous to an American Depository Receipt (ADR), is an American Depository Debenture (ADD). These are listed securities which are backed by foreign debt securities, unlike ADRs which are backed by foreign equity securities. Unlike in India, where we use the words bonds and debentures interchangeably, in the US the word debenture is specific to an unsecured debt security. Secured fixed income securities are termed as bonds.
Investors should keep proper records of their investments. The Indian tax authorities would demand periodic details. If an investor were to earn dividend and other income beyond a specified limit, he may have to file tax returns in the US as well.
The writer is CEO, Tarheel Consultancy Services