Two weeks ago in this column, we read why it becomes obvious for Indian investors to allocate at least a small portion of their portfolio to overseas markets. Today, we extend that discussion to some performance-related aspects of achieving global portfolio diversification.
Before starting to build a forex portfolio, investors should assess their specific needs from this pot: are you doing this purely for the diversification benefits or do you need a forex investment for future lifestyle goals? Need to nest? Are you just getting started with global diversification or are you experienced enough to evaluate different ideas?
Basic Global Diversification Versus Building a $-denominated Nest Egg: For someone seeking fundamental exposure to major global indices such as the Nasdaq or S&P500, or mutual funds overseas, it may be sufficient to invest in domestic mutual funds (called feeder funds) that invest in either India or foreign securities. Invest in overseas domiciled funds. Like other domestic mutual funds, they are easily accessible on your custom mobile investing app. It doesn’t even require you to set up foreign brokerage accounts or send dollars overseas. From a simplicity point of view, this is a great option. However, despite there being around 60+ funds in this sector, the options become less when you try to bucket them into country, industry segment and asset class categories. In addition, regulators have placed restrictions on foreign investment by feeder funds to a total of $7 billion.
While the above basic can help with global portfolio diversification, as the amount is invested in a rupee portfolio in India, it does little to help build a long-term, forex nest-egg overseas. It also fails to provide access to a wide range of global investment options. These objectives can be accomplished only by sending capital abroad and making investments. India does not yet have full capital account convertibility, which means that we cannot freely convert rupee/rupee denominated assets into foreign currency assets today. There are strict rules around this. But this does not mean that Indians cannot invest overseas.
Compliance with Foreign Investment Regulations: Under the Liberalized Remittance Scheme (LRS) route of the Reserve Bank of India, every Indian resident can remit up to $250,000 per year abroad for various eligible purposes including investing abroad. In August 2022, the Reserve Bank of India updated its foreign investment regulations, providing further clarity on the types of investments that can be made by both Indian residents and entities. Indian residents can freely make Overseas Portfolio Investment (OPI) in foreign securities, as long as certain conditions are met. Positive changes have also been made to the Foreign Direct Investment (ODI) regulations, which provide more flexibility to Indian entities to invest abroad. Investors are advised to take advice from regulatory experts, especially if their overseas investment is unlisted/complex.
Choosing the right investment platform and advisor: Once investors or their family entities are ready to begin investing overseas in a compliant manner, the next big thing to think about is how to go about making specific investment decisions.
Anyone can start investing with a simple foreign trading account through a domestic or foreign brokerage. A large number of digital platforms today allow Indian investors to invest in overseas listed securities using the LRS route. These are great if one is looking for quick execution, but can sometimes fall short when it comes to delivering high quality, tailored investment advice. While some trading platforms also provide investment advice, they are generally incentivized by product or transaction commissions. If so, they might not always suit your interests.
There is some merit in working with an investment advisor who has a presence (preferably regulated) and expertise in the offshore market. Capable advisors also have strong sourcing and manager/investment selection capabilities in their local market. Working with consultants has the added benefit of tapping into their network of experts in the overseas market on matters relating to cross-border taxation, estate and succession planning, and more. As always, cost plays a big part in who you decide to work with, as do the tax implications of the investment being made.
While paying an advisory fee may seem unusual at first in a commission-driven market like India, it is important to remember that good advice will more than pay for itself over time.
(The views expressed in this article are personal.)
Shilpa Menon is Senior Director – India at LCR Capital Partners.
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