Want to invest in foreign stocks? Keep in mind the added costs and hassle.

Want to invest in foreign stocks? Keep in mind the added costs and hassle.

Investing in overseas markets is a great way of diversifying your portfolio. By spreading investments across countries, you can mitigate risks associated with domestic market concentration and benefit from growth opportunities in different regions. It also allows you to tap sectors and industries that may not be well-represented in India, making for a more balanced and resilient portfolio.

When considering investments in international markets, you face the same choice as you do back home – should you invest in stocks directly, or through an index fund or ETF?

Also read: Own foreign stocks or MNC Esops? Omit them from ITR at your peril

Investing directly in international stocks allows investors to handpick companies and tailor their portfolios to their specific preferences and strategies. However, this is not only more risky but also more complicated. ETFs can help mitigate this risk, but keep in mind that some can be just as risky as stocks, so it’s best to stick with ones that track broad US indices such as the S&P 500.

Let’s take a look at some of the complexities of investing directly in foreign stocks and ETFs.

The tax implications

When sending or investing money overseas, resident Indians are subject to a limit of $250,000 a year under the RBI’s Liberalised Remittance Scheme (LRS), and a 20% tax collected at source (TCS) applies to investments in foreign stocks beyond 7 lakh a year. This TCS can be reclaimed when filing an income tax return. “Also, if the shareholder passes away, an inheritance tax of 20-40% applies in the US if the amount exceeds $60,000. This can add significant costs for direct stock investors,” said Gautam Nayak, a chartered accountant.

Also read: Why global stocks were a big miss for PPFAS MF’s Rajeev Thakkar

Gains from direct stocks and ETFs held for more than two years are taxed at 20% with the benefit of indexation, potentially lowering the taxable amount over time. Gains on domestic, rupee-based global funds, on the other hand, are taxed as per your income tax slab rate. “Gains from international funds fall under Section 50AA of the Income Tax Act, 1961 and are taxed similarly to debt mutual funds, which is as per the investor’s tax slab rate, regardless of the tenure,” said Prakash Hegde, a chartered accountant in Bengaluru.

However, managing and disclosing international stocks can be cumbersome, especially for working professionals. “Disclosing international stocks can be an additional hassle for working professionals. In contrast, rupee-based international funds provide a simpler alternative,” said Gautam Nayak, partner at CNK & Associates LLP.

The costs

To trade international stocks directly, you need to open a demat account with a registered depository participant (DP) and submit the necessary documents. Today, most DPs offer several options, allowing investments in stocks, bonds, mutual funds and international stocks through a single account.

According to Vested Finance, the costs associated with investing in overseas stocks include a foreign exchange (FX) fee of 1.5% one way (and an additional 1.5% for converting back into Indian rupees) and a brokerage fee comprising 0.2% of the trade value. These FX and brokerage fees can vary depending on the brokerage firm.

Also read: Some international funds are still open for investments. Here’s a list.

Viram Shah, co-founder and chief executive officer of Vested Finance, said many investors avoid investing overseas because of perceived complexities and costs. However, technology has simplified the process of opening a global brokerage account. “One can easily add high-quality global companies to their portfolio through a simple process enabled by technology,” Shah added.

Direct stocks and ETFs provide more control but can be more complex and cumbersome than investing through rupee-based overseas funds. Investors should consider their financial goals, risk appetite and administrative capacity when choosing between these options.

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