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Investing in Stock Markets Abroad

How you can invest in stock markets outside India and some risks involved


Indian citizens had the ability to invest abroad as early as 2003. Investments in mutual funds up to $25,000 in a calendar year were allowed. Since then, the Reserve Bank of India (RBI) has raised the limit to $2,00,000. This has opened up many investment categories for Indian investors. You can invest in stocks, mutual funds, foreign currencies, real estate and insurance policies anywhere in the globe. You could also invest this amount in hedge funds, currencies and currency derivatives. So, the global markets, with its glittering array of financial products, are now just a click away.


Why invest abroad?


For some of you would are interested in equities, there are thousands of shares listed in global equity markets to choose from. But first and foremost, you must be clear on why you want invest abroad. There are many good reasons for investing in equities abroad. For example, as a risk-averse investor, you may simply wish to build a balanced, global portfolio. On the other hand, if you prefer to specialize in technology investments, you would want to buy shares listed in NASDAQ, as most of the world's leading technology companies are based in the US and quoted on the NASDAQ stock markets. Your reasons for investing abroad could be simply to get a good portfolio diversification or could be to get some alpha returns by finding undervalued or fast-growing stock markets.


How to invest


The procedure for investing in stock markets differs from country to country. To invest in the US markets, you can either go through any of the leading domestic brokers who have tie-ups with US brokerage firms or sign up with an online US broker directly. Your decision will be a function of the quantum of your investable surplus, cost, convenience and frequency of deals. For small and infrequent deals it may make sense to go through a domestic broker. Brokerage, administration charges and other fees tend to be higher abroad.


In most European countries, you usually have to open an account with a broker in the relevant country before you can trade. Japanese markets however have another added complication. You have buy equities in lot sizes of 1,000 shares or occasionally 100 shares. So, the quantum of investment required would be rather large. This makes Japanese markets rather inaccessible to the average retail investor. Some Japanese brokers do offer to deal in 'mini-stocks', i.e., multiples of one-tenth of a unit. But you have to enter into such deals only after sufficient research and caution to safeguard your investments.


Process


Procedurally, it is very easy for you to start trading in equities abroad. You need a bank account with a branch that allows foreign remittances, and an account with a provider/domestic brokerage.


Domestic service providers have tie-ups with international equity brokers, who allow you to use their platform for trading. You have to transfer your investment corpus to your brokerage account by filling up Form A2. The money is transferred in a day or two. You can buy shares in a matter of a few clicks on your trading screen. Similarly, you can sell your investments online. You can transfer your money electronically back to your bank account.


Risks



There are some risks involved when you trade in a foreign country. You need to consider these before getting in. They are:


a) Currency risk


Investing abroad is for people who are thoroughly informed or who are very brave. Currency risk is one of the biggest minefields you encounter in international investing. You may be lucky enough to invest in a foreign share that runs up 50 percent. But if the local currency halves in value against the rupee, you will be no better off than earlier. Let's look at this with an example.


On January 1, Re 1 is equal to 1.50 Philippino pesos. You spend Rs 15,000 buying 100 shares in a Philippine brewer at 150 pesos per share. On December 1, the shares in the brewing company have doubled in value to 300 pesos. Your investment is now worth 30,000 pesos. Unfortunately, the exchange rate is now Re 1 = 0.75 pesos. Converted back to rupees, your investment is still only worth Rs.15,000.


b) Custody risk


In many countries, including India, investors get some degree of protection from frauds, bankruptcies and misdeeds of the broker with whom you have entrusted your investments. For example, under UK laws, a UK investor enjoys a high degree of protection when he places his money with an authorized UK investment firm. Any losses he suffers if the firm collapses will be made good to a maximum of £48,000. The scheme is funded by insurance contributions paid for by member firms, and ultimately backed by the government's own guarantee.


If you have such a safety net you do not have to worry constantly about whether you can trust those handling your money. Such protection may not be available in other countries or these laws do not extend to foreign investors. It is therefore possible that you may lose everything in the event of fraud, negligence or mismanagement. Reading up about investor protection norms in the country you want to invest in may go a long way in safeguarding your money.


Investing in global stock markets will be rewarding for investors who acquire in depth knowledge on the functioning of international stock markets.

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