We all love reading stories about investors who made it big by investing in the right foreign stocks. According to financial planners, the key ingredient to achieving investment success is diversifying your portfolio. But how do you achieve that at the right time? Many investors diversify their portfolios by investing in international market promising avenues. These reduce risk and increase returns. It acts as a hedge against currency depreciation. Growth rate, inflation rate, currency value, interest rates, and natural resources also vary from country to country. Hence, the returns and risks from investments are different in each country. Therefore, you need prudent analysis when investing in global stocks. You also need to consider the language, currency conversions, foreign exchange regulations, and economic stability. Are you an Indian investor looking to expand your investment portfolio by investing in international stock? Here are things you need to consider before diving into it.
Consider the foreign exchange
One key factor to consider when investing in the international stock market is the exchange rate of the two countries. Foreign exchange fluctuation is the volatility of the foreign exchange currency (for example, the US dollar or British pound). Indian investors should understand that their gain is determined by the conversion rate of the two currencies. Also, the exchange rate can be volatile, and it’s impacted by economy, demand, supply, and political factors. When you invest in the US markets, it may cause profit or loss. That is, if dollars strengthen against the Indian rupee, it gives an extra boost to your portfolio value and vice versa. Additionally, the Indian rupee has been declining against the US Dollars over the years. Therefore, investing in their market is a wise investment strategy.
Tax charges
It is important to consider tax implications on your foreign investments to make profits. For instance, India and the US have a Double Tax Avoidance Agreement (DTAA). These prevent taxing the same income twice. The period for which the investment is held also plays a vital role. There are two taxes for your investments in the US stock market in India. They include:
Long-term capital gain (LTCG)
This is applicable when you hold the stocks for over 24 months before earning capital gains. Investors will be taxed at 20% plus the applicable fees and other surcharges.
Short-term capital gain (STCG)
Applicable when the profits from investments held less than 24 months. They are added to investors’ regular taxable income and standard income-tax rules apply.
Dividend Tax
The US stock dividends are taxed at a flat rate of 30% for foreign investors. However, because of the tax treaty between the US and India, the tax rate for Indian residents is 25%. Due to the DTAA between the US and India, the tax paid can be claimed as FTC in investors’ domestic filing.
Understand the market
When investing in international money, understand and analyze the risks associated with investmenting in the country. These offer stability to your portfolio and profit in the long run. Consider the geopolitical risks, macroeconomic factors, future business prospects, among others. For instance, investment in the stock market in a country with potential war or conflict with India is not advisable. Stock markets in developed countries also tend to be less volatile than developing ones. Investing in the US stock market allows participating in global growth. It also exposes you to wider economies and companies with large profits and revenues.
Other charges
Investing directly in US stocks requires opening a brokerage account. Funding your brokerage account needs a transfer of funds from your bank account. There may be transfer charges and FX conversion charges depending on your bank. Charges related to account maintenance and transaction charges can be flexible. It also depends on fixed dollar deposits and total traded amounts. Frequent trading and currency conversion may also attract additional charges. This is because of multiple transfers of funds and transactions.
Life goal and fund limit
Life goals are crucial when planning to invest in international stock. Ask yourself questions like: Why do you want to invest in the country? What is the long-term gain for investmenting there?. Do you intend to study abroad or relocate to the country? Your investments should be able to help you achieve your life goals. It should also reflect those expectations. Investors in India are permitted to invest a maximum of $250,000 annually in the US stock under the Reserved Bank of India Liberalized Remittance Scheme. They also need to submit form A2 to RBI authorized dealers. Wrapping up Investors in India can invest in International markets. But there are many costs and legal obligations attached to it. Diversifying their investment portfolio across many geographical areas will help them generate stable returns in stock investing. It also helps them plan for the future.
