For international investing, you must begin with ETFs and index funds

As for stock investing, depository receipts offer better protection while international broker route offers more choices

A new route for investing in international stocks has opened up for Indian investors that goes via the International Finance Services Centre (IFSC) at GIFT City, Gandhinagar. Investors can invest via the National Stock Exchange (NSE) International Exchange (NSE-IFSC), a subsidiary of NSE. Currently, they can invest in depository receipts (DRs) of eight stocks. The number will soon be raised to 50, and expanded later. 

Investors can also go via India INX Global Access IFSC (INX GA), a special purpose vehicle set up by BSE's India International Exchange. India INX has tied up with United States-based Interactive Brokers. This route will allow investors to invest in a large universe of stocks, exchange traded funds (ETFs), and managed portfolios across the US, Asia Pacific, and Europe.

For some years, many domestic brokers have enabled their clients to buy stocks through similar tie-ups with foreign brokers.

DR route promises regulatory oversight

In the route offered by domestic brokers (through tie-ups with international brokers), the investor’s orders are passed on to the international broker, which buys the shares. These shares are then held by the international broker in its own name.

“A problem can arise if the international broker defaults. The Indian investor will have to approach the entity responsible for investor protection in an international jurisdiction to reclaim her shares and money. This may prove difficult,” says an NSE spokesperson.

In the NSE-IFSC route, shares acquired in international markets are deposited with the custodian (HDFC Bank), which issues Depository Receipts (DRs) against them. These DRs will trade on the exchange in Gift City.  

Once purchased, DRs will be held in the investor’s name in his account in Gift City. “Investors will get the benefit of the entire regulatory setup established in Gift City by the IFSC Authority,” says the NSE spokesperson.

Fractionalisation of shares will also be managed by the exchange and the custodian.  

Easy route

Most leading Indian brokers have become members of NSE-IFSC. “All that the client has to do is get the KYC (know your customer) formalities completed with his broker, transfer money under the LRS (Liberalised Remittance Scheme) route, and begin trading,” says Hemang Jani, head-equity strategy, broking and distribution, Motilal Oswal Financial Services.

NSE-IFSC is also working on obtaining better exchange rates for its clients.     

Limited offerings and liquidity issues

Trading on the NSE-IFSC platform started on March 3 with just eight US stocks. This will be increased to 50 initially. “Once the system stabilises, we will increase the number of US stocks, and even offer stocks from Europe and Asian countries,” says the NSE spokesperson.

The BSE-India INX route, or the one offered by brokers, offers a lot more choices.   

Liquidity could be an issue in DRs, at least initially. “There will be market makers to offer buy and sell quotes. Liquidity will be less of an issue as participation improves,” says Jani.  

Should you go for it?

The NSE-IFSC platform offers individual stocks. Many retail investors may lack the ability to pick the right ones. “They may buy names they are familiar with. Ideally, this should not be the basis for stock selection,” says Vishal Dhawan, chief financial planner, Plan Ahead Wealth Advisors.

Many international stocks belong to new-age companies to which traditional valuation metrics may not apply. Evaluating the prospects of these global companies may also be beyond the ken of many investors.

“Retail investors who are new to international investing should first opt for diversified portfolios, such as exchange traded funds (ETFs) or index funds,” says Dhawan. Currently, the BSE-international broker route offers ETFs. Only evolved investors should invest in individual stocks.

Finally, weigh the costs of investing directly. According to Dhawan, this route is better suited for those investing larger amounts. Those investing smaller amounts should opt for international mutual funds. Dhawan also suggests transferring a large amount at one go to avoid the adverse impact of rupee depreciation.