What Is Global Investing? Benefits, Risks and Who Should Do It

What is global investing? Investing in assets outside your home country is an important part of building a global investment portfolio. Assets may include foreign company shares, foreign mutual funds or ETFs. The Indian economy is large, growing and offers many investment opportunities. Domestic equities, debentures and mutual funds cater to a wide range of retail and institutional Indian investors. For the average retail investor, global investing has the potential to provide the benefits of diversification and exposure to a broad array of economies, industries, businesses, and currencies outside of India. Global investing is not speculating. Investors should not abandon their domestic investments.

Want access to international markets? If you want exposure to international companies, first familiarize yourself to the available routes, requirements and risks. Global investing resources for Indian investors provide an understanding of the various options and the services and access requirements to international markets.

There are many complicated elements to international investing such as other currencies, foreign markets and different taxation and regulations. The fundamental concept is not complicated. International investing means a person decides to hold investments whose underlying businesses or assets are located outside of India. The important things to consider are what exposure is being purchased, how it aligns to the investor’s overall financial plan, and whether the costs and risks are understood.

What is global investing, in simple terms?

Global investing refers to including investments outside your country’s market. For an Indian resident, it means including investments in markets like the U.S., Europe or Japan, or a fund that owns investments in various markets. A global fund can invest throughout the world while a country-specific fund can invest in a particular market. A thematic fund can also invest in a particular industry, irrespective of where the companies are located.

For example, an Indian investor may already own Indian companies in banking, FMCG, manufacturing and IT. A foreign investment can offer foreign companies in industries that are under represented in the domestic investment. However, just for diversification's sake, adding foreign investments does not guarantee that the portfolio will become safer. Foreign investments can even increase the overall risk in the portfolio if the new investments do not offset existing risk in the portfolio.

There can be a difference between simply owning an ‘international’ product and true global investing. True global investing requires evaluating the actual holdings, geographic diversification, benchmark, currency exposure, investment objective and cost. A ‘global’ fund can be heavily invested in one or two countries. Just using a ‘global’ moniker does not ensure a fund has true global diversification.

Why might Indian investors consider international exposure?

1. Diversification across economies and markets

A country's economy is defined by its monetary policy, demography, regulations, corporations, and business cycles. Stock markets are interconnected, but are not fully synchronized. Changes in risk and return are likely to be greater when portfolio diversification spans markets. While it is less risky to hold investments in multiple markets, it does not guarantee a profit.

One should analyze the correlation of the markets. For some periods, markets may behave differently, but for others they may behave similarly due to global shocks. Foreign investments are unlikely to always offset losses in Indian investments and vice versa. International investments allow for diversification into other industries.

2. Access to businesses and industries beyond India

Foreign markets may have better representation of certain industries. International funds can provide exposure to foreign technologies, healthcare, consumer, industrial, and financial services, and other sectors. It can provide international reach to companies with goods and services that span across borders.

A company can have global operations, but that does not necessarily make the company listed in the foreign market globally diversified. For example, an Indian listed company may have a significant portion of its revenue from operations outside of India and a foreign listed company may be heavily dependent on one region for its operations. Geographic exposure of a listed company cannot be fully determined by the exchange on which it is listed.

3. Exposure to different currencies

Investments made outside India are denominated in currencies other than the Indian rupee. When an investment is made in U.S. dollars, an Indian investor is exposed to USD/INR exchange rate risk in addition to the risk associated with the investment. This is known as currency risk. Currency risk is significant when there are expected future expenses in a foreign currency. For example, a student investing in U.S. dollars is exposed to currency risk if he expects future education expenses in U.S. dollars. Currency risk can also be unfavorable if there is uncertainty about future expenses.

An appreciating currency may enhance the rupee value of an investment. For example, a depreciating currency may reduce the rupee value of an investment even if the price of the investment in the local currency has not changed. Returns from currency movements are highly unpredictable and may not be reliable in the long run.

4. Aligning investments with foreign-currency goals

Someone saving for foreign university fees or for an international move, for example, might want to know more about foreign currency investments. The time horizon, the amount required and the payment date remain the most important factors. Equity investments are inherently risky, and the value can fall just before the payment date. In general, equity investments are not suitable to finance foreign currency payment obligations, unless the payment is a long time in the future.

Matching a foreign currency goal with foreign currency investments is also a risk. Just because you have a foreign currency liability in the future, for example, a dollar liability, it doesn't necessarily mean that you should take the risk of a foreign equity investment to match it. Other, less-risky, investments may be more appropriate to match a foreign currency liability, subject to any restrictions and the availability of such investments.

Main ways to invest globally from India

There are multiple routes depending on residency, eligibility, product availability, costs, and the regulations in effect. The routes described below are broad categories, and are not a recommendation to use any particular product.

1. Investing in Indian mutual funds with overseas exposure

A category of Indian domiciled mutual fund schemes, invest in foreign securities directly or indirectly. An investor purchases units of the Indian scheme per the scheme's process. Scheme's documents describe its objective, benchmark, permitted investments, expenses, risks, and terms for purchase and redemption of units.

Investors are comfortable dealing with Indian mutual fund structure and processes. Investors are still exposed to market risks, as well as, foreign exchange and fund-specific risks. Fund-specific risks could include tracking error, liquidity risk, concentration risk and changes in the scheme's ability to accept subscriptions.

Investment rules and limits in a foreign jurisdiction can impact the availability of mutual fund schemes of that jurisdiction. A fund scheme may also stop or restrict new investments, when applicable operational conditions are met. New investment availability should be verified with the fund house at the time of investment rather than from old articles or product listings.

2. International ETFs and fund-of-funds structures

ETFs trade on exchanges like stocks. An international ETF may track a foreign index or include foreign securities. Meanwhile, an Indian fund-of-funds may invest in a foreign fund or ETF, depending on the fund’s mandate and the applicable laws. These structures enable investors to diversify their holdings, but there may be variations in the way these trade, price and provide liquidity.

When evaluating an ETF, consider the index tracked, the method of replication, trading volume and the bid-ask spread. Monitor tracking differences over time, and consider the fund’s expense ratio. In a fund-of-funds, also analyze the expenses and the structure of the underlying fund. Just because a product lists on an exchange, does not mean it will trade with a tighter spread or execute easily at all times.

3. Direct overseas stocks through an eligible route

Some Indian residents may invest in eligible foreign-listed securities using a permitted overseas investment route, subject to the applicable foreign exchange, intermediary and country-specific restrictions. This route offers more control over security level decisions including orders, custody, settlement, dividends, currency, corporate actions, and other considerations.

Conduct due diligence on intermediaries and examine their legal and regulatory status, custody and fee arrangements. Also assess the complaints process, the supported foreign securities, how foreign currency remittances and dividends will be handled, and what tax document support will be provided. Consider if your investment will be in your name or through a nominee or omnibus account, and the consequences of your provider going out of business.

Direct stock selection concentrates risk. Owning a handful of foreign stocks carries less risk than owning an internationally diversified portfolio. Just because a stock is large or popular, doesn’t mean it’s fairly valued. It can still be overvalued or face business challenges.

4. Other eligible overseas assets

Under applicable laws and depending on the investor’s circumstances, overseas exposure can be through certain debt instruments or other assets. There are risks associated with those instruments that are different from risks associated with equities, including credit risk, interest rate risk, liquidity risk, currency risk and country (jurisdictional) risk.

Residents must confirm that a proposed transaction does not violate Foreign Exchange Management Act (FEMA) and other laws. Just because a product is offered on a foreign website or platform, doesn’t mean all Indians are legally allowed to transact with it.

You can find a practical understanding of the direct stock route in post on how Indian investors can approach US stocks. For the fund-based routes, read post on international funds from India.

What global investing does not promise

• It does not provide a higher return than domestic investments.

• It does not guarantee that losses incurred in India will be balanced by gains made overseas.

• It does not exclude equity-market, credit, liquidity or currency risk.

• It does not transform a concentrated portfolio into a diversified one, simply because the securities are located overseas.

• It does not guarantee a scheme/platform will be available for investment when the investor wishes to transact.

Risks Indian investors should understand

Market and company risk

Foreign markets can also suffer a decline. Companies can also suffer setbacks such as weak earnings, legal issues, loss of customers, etc. Even broad market funds can decline due to economic conditions. Past performance does not guarantee future performance.

Currency risk

The return of a foreign investment can vary due to exchange rates and changes in the investment's value. Currency fluctuations can also enhance or reduce returns. Conversion costs can also reduce the returns. Funds can hedge currency exposure and investors can understand what the impact of hedging is and how it can reduce currency exposure.

Country, political and regulatory risk

Foreign markets have their own rules, courts, legal systems, taxes, etc. Sanctions can also block a market or limit the ability to trade. Investors should research the systems in place to ensure their interests are protected and they can take legal action, if needed.

Liquidity, trading hours and execution risk

There may not always be adequate trading volume or liquidity to facilitate your desired trades in a security or ETF. Markets can also be illiquid due to wide bid-ask spreads, lack of electronic quotes or non-trading hours. Local market holidays, time zone differences and various settlement processes can affect the time it takes to implement and settle transactions.

Product and concentration risk

Some international funds concentrate their investments on a single country, industry, or theme. Very different behavior from a broad, diversified international portfolio may occur. Read a fund’s holdings and mandate. A thematic label should not replace an assessment of concentration and valuation.

Tax and reporting complexity

The tax implications of an investment can vary based on the legal structure of the instrument, its holding period, the type of income generated, an individual’s country of residence and other factors. Foreign dividends and capital gains, withholding taxes, reporting and potential foreign tax credit questions may arise. The treatment of one international fund may not be the same as that of another. Indian tax laws and treaty provisions can change. When you are uncertain, consult a professional. Do not assume an international investment is taxed similarly to a domestic equity fund.

Regulatory and remittance considerations

Resident Indian individuals wishing to make direct overseas investments should consider the RBI's Liberalised Remittance Scheme (LRS) and related FEMA considerations. The RBI provides information about the LRS scheme, permitted transactions, and related conditions and limits. The investor should ensure that he or she is aware of the latest official position for documentation, the limit, TCS, exemptions, reporting and the bank's procedures, before making the remittance.

LRS is not a broad-based permission for all overseas investments and activities. There may be restrictions for certain activities and instruments, and the rules may be different for residents, non-residents, minors, etc. For a true and fair view, an investor should refer to the RBI's latest directives, instead of trusting an old limit or a social-media summary. The starting point for an investor should be the Reserve Bank of India and related latest directions.

Likewise, mutual funds investing overseas, would be bound by SEBI's limits and requirements, including allowing new investments. The relevant scheme documents, SEBI's official website and related investor information should be referred for the latest position. AMFI and the Asset Management Company should also be referred for related investor education and information about mutual funds.

There are time-bound considerations, which may also impact remittance limits and taxes. This article intentionally avoids including time-based facts, including the changing remittance threshold, TCS rate, etc. For a true and fair view, an investor should refer to the latest requirements, including recent circulars, amendments, notices, and related bank procedures.

Who may consider global investing?

"Investors may wish to consider exposures to international markets if they have a rational reason for seeking such exposures and can tolerate the uncertainty associated with such exposures. The following profiles are for reflective purposes and are not to be construed as an eligibility assessment or personal recommendation."

Investors with a long-term horizon

A long-term horizon may allow an investor to ride out market cycles, but does not remove the risk of permanent loss. It does not guarantee recovery of the investment. The investment should be in alignment with an investor’s risk tolerance and the role it is to play in the investor’s overall portfolio.

Investors whose existing assets are heavily concentrated in India

A person who is largely tied to the Indian market may investigate foreign investment for diversification. First they should outline their current holdings including Indian companies that generate a large portion of their revenue from outside India, and domestic mutual funds that currently have international exposures. The goal is to have a complete understanding of the portfolio.

Investors who understand the product and its costs

Global investing may be more doable for an individual who is able to read scheme documents and understand currency effects, costs, and charges. Investors who don’t understand these may find it beneficial to educate themselves before making a hasty decision.

People planning a foreign-currency goal

People with a future expense in a foreign currency should consider their currency exposure as part of a goal-based investment plan. There are a number of factors to consider including how far off the target is, how certain you are of the foreign liability, and what would happen if you had to sell your investments to meet the liability during a market decline.

Who should pause before investing globally?

An investor may not be ready for global exposure if they do not have an emergency reserve, have high-cost debt, need the money in the near term, or cannot tolerate a decline in their investment. An investor who does not understand the product, the remittance route, custody or tax implications should take care of those issues before investing.

An investor should also pause before investing globally if they are choosing an overseas asset only because it has recently performed well or because they think they have an edge based on a social media post or something similar. Recent performance can reverse. Familiarity is not an edge.

Global investing should be added to a well-thought-out financial plan rather than used to chase returns, borrow to speculate, or replace a bad domestic financial plan.

How to evaluate an international investment

1. Define the purpose. Are you wanting to achieve diversification, gain exposure to a specific market, or achieve a foreign-currency goal? Avoid vague purposes such as “earn more internationally.”

2. Review your existing portfolio. Identify domestic and international exposures, concentration by company and sector, and how the new investment would impact your overall risk.

3. Understand the underlying assets. Read the fund mandate or check the security information. Analyze geography, sector and weightings, top holdings, benchmark and if the investment is broad or concentrated.

4. Compare the complete cost. Look at expense ratios, brokerages, currency conversion, remittances, custody, spreads, and other charges pertinent to the route.

5. Check liquidity and access. Look at trading hours, holidays, settlements, redemptions, subscriptions, and the process of receiving the proceeds.

6. Verify legal and tax requirements. Look at the latest official documents and the service provider’s documents. For questions pertaining to your specific circumstances, look for qualified legal and tax help.

7. Decide how it fits. Look at your investment in the context of your other investments, including emergency funds, debt, time horizon, and your tolerance for loss. Consider why you’ve made your investment decisions and not treat them as permanent if things change for you.
   For context on how other investments outside of India work in relation to India's markets, read the beginner's guide to stock market basics in India. Understanding the Indian market can give local investors more context on how to analyze local and international investments.

Common mistakes to avoid

• Assuming foreign means better: Returns from overseas markets can be bad and valuations are important everywhere.

• Ignoring currency effects: Returns from local markets and rupee returns can be very different.

• Buying without reading holdings: A country or theme fund can be a lot more concentrated than expected.

• Overlooking total charges: Small costs or charges can really eat into the returns.

• Relying on outdated rules: Conditions on remittance, tax and fund subscription can change.

• Investing money needed soon: Volatility in the market can make it difficult to cash in your investment at the time you need it.

• Confusing access with suitability: Just because a fund, service or platform is available to you, doesn't mean you should use it.

Reviewing global exposure through a suitable access route

After understanding the product and assessing risk, investors should understand how available routes will provide access to invest in international markets. Operational and support related questions should also be answered. Use the InvestEdge360 global investing page as a starting point, and determine for yourself whether to review the available operational and support related information.

Conclusion: global investing is a diversification decision

Global investing provides Indian investors the opportunity to invest in companies, markets and currencies beyond India. Its true potential is realized when the exposure complements the existing investment portfolio and goals. There is no guarantee international investments will always outperform.

We understand and acknowledge the risks in investing. Whether it be from market fluctuations, foreign currency fluctuations, over reliance on one market/investment, liquidity, tax and legal complexity, and cost-related issues, investors should assess the product to determine if it fits their particular needs. Do not invest money you cannot afford to lose.

We always encourage education. Compare investment structures and assess the role foreign investments play within your overall financial plan. For further investor learning and financial planning investment resources, check out our website. This article is general information, not personalised investment, tax or legal advice. Laws and product terms can change, so verify prior to making an investment decision.