 "Bypass MFs' foreign investment limits, access wider product menu via LRS")
Kotak Mutual Fund recently suspended subscriptions to its Kotak NASDAQ 100 Fund of Fund, which invests in units of overseas exchange-traded funds (ETFs) and index funds based on the NASDAQ 100 Index. This suspension follows similar actions by other funds facing investment restrictions.
Industry-level limits exist of $7 billion for fund-of-funds and $1 billion for ETFs. Breaching of these limits leads to the suspension of new investments in international funds.
Diversify geographically
Many investors with well-developed domestic portfolios are now venturing into international markets to gain from geographical diversification. “Investing abroad helps mitigate currency risk for foreign-currency denominated goals, such as children’s higher education and international travel,” says Vishal Dhawan, chief financial planner, Plan Ahead Wealth Advisors.
Investing in markets such as the US that have low correlation with the Indian market helps shield portfolios against downturns in the domestic market. Dhawan adds that investing abroad also enables Indian investors to get access to businesses and themes not available on the Indian exchanges, like artificial intelligence, green energy, semiconductors, and search engines.
“With the industry-level limit getting breached and funds having to temporarily suspend fresh subscriptions, investors’ planned monthly allocations are getting hampered,” says Arvind A Rao, founder, Arvind Rao and Associates.
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When one fund closes for subscription, investors must move to another that is still open. Financial planners say this leads to a pile-up of international funds in portfolios. Rao advises checking with a fund house before trying to invest in its international fund.
Explore the LRS alternative
Under the Liberalised Remittance Scheme (LRS), an Indian resident can send up to $250,000 abroad each financial year for a variety of purposes, including investment. They can invest directly in approved foreign securities via this route, thereby circumventing the limits mutual funds are subject to.
Investing abroad via the LRS route offers a major advantage. “Investors get access to a much wider list of securities than is available through the mutual fund route,” says Subho Moulik, founder and chief executive officer, Appreciate.
However, as Rao points out, investors need to undertake additional paperwork to open a foreign bank account and an account with a platform that facilitates international investments.
Remitting money abroad entails a fee for each transaction. The platform too charges a fee.
“When one remits money abroad, a TCS (tax collected at source) of 20 per cent is deducted which has to be claimed later as a refund,” says Dhawan.
Rao points out that besides market risks, these investments are also subject to exchange-rate risk.
Suitable for big-ticket investors
Dhawan says the minimum annual investment at which the time, cost and effort (including tax compliances) involved in making LRS investments becomes worthwhile is $50,000 (around Rs 41.7 lakh). Rao adds that mature investors who understand international markets and want to scale up their investments may opt for this route.
Follow tax-related norms
Rao cautions that while filing their income-tax returns, investors must disclose their foreign investments correctly, including details like the cost of investment, its highest value during the year, and closing value.
While filling up the form for remitting money, the purpose code must be filled in correctly. Dhawan cautions against exhausting the entire $250,000 limit for investment purposes as one could need a portion of this amount for other things (travel, and medical treatment abroad).
Moulik suggests investing through a reputed bank and sticking to permitted securities only (cryptocurrencies, for instance, are not on the Reserve Bank of India’s permitted securities).
After transferring money abroad, invest it. “The RBI has stipulated that any money remitted abroad that is lying unused must be brought back,” says Moulik.
Check platform cost, offerings
When selecting a platform, check out its per-transaction charges and annual fee. “The tax reports it provides must make it easy for investors to do tax reporting accurately,” says Dhawan.
The platform should be easy to navigate. “Go for one that offers access to a wider range of securities and charges minimal transaction costs,” says Moulik. The platform, according to Rao, should be compliant with Indian regulations.