Investing in the foreign market will lead to a wider spectrum of opportunities. However, there are a few challenges too that one has to account for before moving forward.
Money makes money and who knows it better than an investor? We all are fascinated by the stories of investors who made it big by choosing the right investment option at the right time. The likes of giants such as Microsoft, Google, Amazon, Apple, etc have turned the fortunes of a lot of people and their net worth has surged exponentially.
Investors always look to diversify their portfolio to reduce risk and increase the returns. However, most of them consider only sectors, industries and market capitalizations as the factors of investment. But some astute brains are aware of the fact that international investment is a promising avenue if the mathematics is smartly done. The international stock investment diversifies your portfolio both geographically and sectorally and acts as a hedge against currency depreciation. With the technology at disposal, one can easily navigate the trade movements and analyze the growth trajectory and take a calculated investment decision.
The investment decision in global stocks rides through various determinants. Right from the language to currency conversions and foreign exchange regulations to political and economic stability, there are elements that require prudent analysis before taking any step forward.
The Covid pandemic’s jolt to the last couple of quarters have thrown unprecedented challenges to the entire world resulting in the trade stress that was reflected in the bearish stock market sentiments globally. The trade analysts and stock market pundits, however, find this situation to be an appropriate time for investors to place their bet.
Indian investors who are looking to expand their investment dashboard by adding international stocks have certain ways to dive in. The instruments such as Depository receipts – American depository receipts (ADR) & Global depository receipts, Exchange-traded Funds (ETF), Overseas-focused mutual funds, Direct investment in foreign stock and employee share-based plan (ESBP) are available with people to include in their portfolio.
1. Depository Receipts in the form of American Depository Receipts (ADRs) & Global Depository Receipts (GDRs)
ADRs are one of the most popular and convenient ways to foray into international stock investment owing to ease of use, dollar-based pricing and standard terms and conditions. American depositary receipt (ADR) is a security that is used by foreign companies to trade on U.S. stock exchange. ADRs can be listed on any of the New York Stock Exchange (NYSE) or the Nasdaq but are also sold over the counter. Banks and other financial institutions buy the shares of these companies through their foreign branches and make ADRs available for investors as a form of indirect ownership. Their treatment is however similar to other domestic stocks listed on the exchange. ADRs are often a must-have in an International investor’s portfolio. ADRs can be both sponsored and unsponsored and generally have three levels depending on the trade requirements of the companies.
Global Depository Receipts on the other hand are also a category of depository receipt that represents a bank certificate which is issued in more than one country. In such cases, the stocks are held by foreign branches of international banks and traded as domestic shares but sold globally in the respective countries through its branches. GDRs are usually offered to institutional investors before being made public.
2. Global Mutual Funds
Those investors who want to test the international waters prefer global mutual funds to start their global investment journey. These funds are typically invested in the assets outside the home country. These funds become free from any domestic disruption and therefore give diversification and promising returns.
3. Exchange-Traded Funds
ETFs are reckoned as convenient investment instruments that enable domestic investors to take international routes. ETFs have a similar characteristic to the mutual funds where funds are collected from multiple investors and invested as a corpus in global stocks after a systematic evaluation and trend projections. ETFs have a low risk of trading and are considered a safer option to pursue.
4. Direct Investing
In direct stock investing the investor can buy foreign stocks directly under the guidelines of liberalized remittance scheme issued by Reserve Bank of India. The returns are usually in the form of price appreciation on sale and the dividends yielded by the stock. It is considered as a trickier investment option as compared to others for a novice as there are various points to consider such as tax implications, currency conversions, technical knowhow, and brokerage firm’s credibility. It works well with seasoned investors who have good experience and understanding of the stock market.
5. Employee Share-based plan (ESBP)
In the era of globalization, companies find ways to engage and retain the talent and ESBPs are reckoned as one of the most successful practices. Employee stock option plan (ESOP), Restricted Stock Unit (RSU), and stock appreciation rights are a few of the most important subsets of ESBP.
The investment in these options can be done through various means such as using an account with Indian Brokers having a tie-up with a foreign broker or opening an account with the foreign brokerage firm. With the technology making the world one village, there are various apps and self-help tools that can enable the investors to use their platform.
Investing in the foreign market will lead to a wider spectrum of opportunities. However, there are a few challenges too that one has to account for before moving forward. Being an investor is easy but being a profitable investor requires some diligence and astuteness. The investment objectives, costs, returns and risk-taking capacity play an instrumental role in determining your success.
(By Kailashnath Adhikari, Managing Director, Governance Now, A Sri Adhikari Brothers Enterprise)