Things to check before buying foreign stocks outright

If you are a savvy investor, you can also invest directly in specific stocks/ETFs. Of course, a special platform is also being set up at GIFT City, Gujarat to enable international securities transactions.

Currently, investments by mutual funds in foreign stocks have been suspended due to the mutual fund industry reaching the Securities and Exchange Board of India’s (SEBI) $7 billion limit. However, this limit is expected to be increased soon.

In this story, we focus on the options available to an investor through the direct stock picking route and how it compares with the mutual fund route.

options available

Some of the Indian brokers/platforms have tied up with foreign brokers to facilitate direct investment in foreign markets for their users.

For example, ICICI Securities affiliated with Interactive Brokers LLC, a registered broker dealer regulated by the US Securities and Exchange Commission (SEC).

Fintech platforms in India such as Vested, Stockl and Grow also provide facilities for foreign investment.

Investors can also directly open an account with a foreign broker who is providing services in India. In all cases, the account will be maintained and maintained by the foreign broker.

Make sure the foreign broker is a member of the Securities Investor Protection Corporation (SIPC). In such a case, your account will be insured in the form of securities in your brokerage account.

Such securities held in a SIPC member’s account are protected for up to $500,000 in the event of the foreign broker’s bankruptcy.

The countries to which access is provided depend on the broker/platform you choose.

For example, ICICI Securities allows investments in geographies such as US, UK, Germany, Japan, Singapore and Hong Kong.

Whereas Grow provides access to most US stocks.

When the amount is transferred from your Indian bank account to a foreign bank account, transfer charges will be applicable.

If you are investing through an Indian broker, brokerage/commission charges will also be levied.

These fees vary with the subscription plan that an investor purchases with the broker.

For example, ICICI Securities has three plans – Zero Cost Classic, Global Select At 999 per annum and Global Advantage at 9,999 per year. The brokerage charges for these plans are $2.75 per trade, $1.99 per trade and free, respectively, for transactions with the US.

Most of these platforms also allow you to make fractional investments, so you can buy part of a stock regardless of its price.

For example, you can buy 0.1 share of stock ‘X’ for $300 (let’s say 1 share costs $3,000).

It gives an opportunity to participate and invest in stocks which are expensive and not cheap.

In addition, many of these platforms also offer ready-made portfolios, which will be supported/developed by investment advisors.

These are pre-configured baskets of stocks and exchange-traded funds (ETFs) that you can invest in right away.

HDFC Securities calls this a ‘stack’ which is contributed by the Drivewealth foreign broker.

Say, the EV stack on the platform is an electric vehicle portfolio with long-term investments in companies developing electric vehicles, autonomous vehicles, batteries and other EVs.

Each pre-built portfolio has a fee which is calculated as a percentage of the investment value and may also depend on the basic/premium subscription plan chosen by the broker.

The AUM charges vary with each provider and are roughly in the range of 1-3 percent.

MF vs straight path

Comparing Mutual Funds with Direct Stock Investing abroad cannot be an apples to apples comparison.

Direct investment through a broker comes under RBI’s LRS (Liberalized Remittance Scheme) which deals with foreign currency (usually USD) remittances made by Indian residents.

Under the LRS, a resident is only allowed to invest up to $250,000 per year.

Mutual funds are not covered under these rules. “Investment in mutual funds, along with foreign investment, is still a domestic investment from the perspective of a resident Indian investor,” said Rishabh Shroff, partner and co-head-private client, Cyril Amarchand Mangaldas.

Secondly, in case of investments through mutual funds, the cost is compressed into a single ratio, which is the total expense ratio.

Direct investing, on the other hand, includes bank transfer fees on transfers and remittances (about 1-2%) and brokerage fees (up to $2) on each transaction.

In the latter case, banks can deduct Tax Collected at Source (TCS) of 5%, when the total remittance 7 lakh or more in a financial year.

Of course, later this can be used by the investor to set-off his total tax liability for the assessment year.

In terms of taxation, while investments through mutual funds are considered debt funds, investments through direct investments are treated as unlisted shares for the purpose of taxation.

Also, in the latter case, the details of the financial assets purchased will have to be disclosed separately in the Income Tax Return (ITR).

One thing to note in the case of direct investments is that, in case of unfortunate death of the Indian investor, investments in foreign securities may attract inheritance tax, while the proceeds from the sale back to India are remitted.

Referring to investments in the US, Kunal Savani, Partner, Cyril Amarchand Mangaldas said, “Typically, wealth tax is levied on US based assets of people who are not US citizens, which include stocks issued by US corporations. The applicable limit for computing the inheritance tax is $60,000 subject to the limit conditions.”

“Contrary to the above, investment through Indian MFs, most likely, will not be exposed to such wealth taxes as the investment will be made by Indian mutual funds and not by individuals,” he said.