Make a cautious start in foreign equities

Begin direct investing with ETFS and curated portfolios and graduate to individual stocks later

Indian investors have always had a home bias in their portfolios. Their assumption has been that since India’s GDP growth rate is higher than that of developed markets, their portfolios would grow faster if they invest all their money in Indian stocks. However, things have not quite worked out so. Experts say a portfolio comprising stocks of leading multinational companies could outperform a purely Indian portfolio because the former would have global leaders who benefit from growth worldwide.

Going global, via the direct route

While Indian mutual fund houses have schemes that offer exposure to foreign markets, many Indian investors are no longer satisfied investing in them. "The number of international funds available in India is limited. The universe of stocks and exchange-traded funds (ETFS) you can invest in becomes much larger if you become a direct participant in a market like the US," says Vikas Nanda, cofounder, Globalise, a recently launched platform that provides guided global investing to Indians.

The international funds offered by Indian fund houses are predominantly equity-based. If you want to invest in asset classes such as emerging market debt, US treasury bonds, or real estate investment trusts, those options are not available.

When someone invests via the fund route, the final returns come back to him in rupees. She then has to take the trouble and expense to transfer the money abroad again, if she has a foreign currency-denominated goal, like a child’s higher education. It is simpler to have a portfolio in the same currency that the investor will finally spend in. The direct route makes this possible.

Attractive opportunities open up to investors who go direct. "You get access to the world’s most innovative companies, like Tesla, Nio (the Chinese carmaker), etc. Companies that are at the forefront in their fields are continuously joining the US market, like Airbnb, Snowflake (in cloud computing) via IPOS (initial public offerings)," says Nanda.

The direct route gives an investor control over the weight of each stock in her portfolio. "An investor may want a higher exposure to Tesla than she would get if she invests through an S&P 500 index fund. She can get that by investing directly," says Viram Shah, chief executive officer and co-founder, Vested Finance. He adds that many investors work in industries wherein they gain an intimate knowledge of companies listed abroad. They wish to capitalise on it by investing directly.

Longer-term investors can reap cost advantages, too, since many foreign ETFS have very low expense ratios.

Be mindful of costs

The fees charged by these platforms are not very high. Globalise, for instance, has two pricing plans. In the first, the investor pays 2.5 cents (around ~1.50) per share. The second plan carries an annual fee of ~5,000, after which she does not have to pay for each trade.

At Vested, the investor pays an initial joining fee of ~399. To buy a pre-built portfolio, she has to pay a fee of $3. These portfolios also have an annual maintenance fee of 0.5 per cent. Vested also has a premium subscription that costs ~2,500 a year.

Investors will have to bear a few additional costs. One, they have to pay a fee to their bank for remitting foreign exchange abroad, usually about ~1,0001,500 per transaction. She will also have to pay a small mark-up while purchasing foreign exchange.

These platforms allow you to make a small start by allowing fractional ownership. However, given all the costs involved, it is advisable if the investor begins with a sum of at least $1,000.

Get the right advice

To assist Indian investors who may find it difficult to research foreign stocks on their own, these platforms offer readymade portfolios. "We do the research and offer curated stocks and ETFS," says Nanda. While some of these portfolios are goal-oriented (say, for someone in his mid-30s who wants to save for his child's education), some are based on specific themes (like artificial intelligence, biotech, etc) that investors may be keen on. The research team periodically suggests rebalancing to adjust the weights of the constituents, and also to change the funds whenever required.

Vested, which has been running for one-and-a-half years now, also offers pre-built portfolios. It also offers investors a feature called Collection. "Investors can look up the universe of stocks in the theme they are interested in, say, electric vehicles, artificial intelligence, etc. We also offer collections based on geography, like Europe, East Asia, and so on," says Shah.

Start with a diversified portfolio

If you are new to foreign equities, begin with ETFS and pre-built portfolios, so that you get a diversified exposure. Only after you have become knowledgeable about foreign equities should you venture into direct stocks.

While buying individual stocks, or thematic ETFS, be conscious of the associated risks. "Technology stocks and ETFS are very popular currently. But what if the sector is adversely affected by anti-trust regulations, or privacyrelated regulations?" says Vishal Dhawan, chief financial planner, Plan Ahead Wealth Advisors. He adds that investors should avoid investing blindly in popular names. They should be conscious of high valuations. He also suggests investing for the long term, instead of trading, so that costs get amortised over a longer period. It is also advisable to take the help of a financial advisor who can help contain risks better.