Everything You Need to Know About Investing in Foreign Markets

The whole world is a big marketplace, and it would be a huge mistake if one is restricted to a single market for investment purposes. Exposure to securities trading in the foreign markets offer numerous opportunities to substantially appreciate their capital and aid in wealth creation.

Access to foreign markets allows investors to capitalise from the global economic growth, and appropriately diversify their portfolio. However, this investment has its own share of drawbacks, owing to the complexity of investing. Through this article, we’ll try to understand the benefits of international investments, its disadvantages and how one can invest in foreign stocks.

How to Invest in Foreign Markets?

• Brokerage Firms

When we think about investing in foreign stocks, the names of well-known firms such as Apple, Samsung, Microsoft, Google, etc come to our mind. Since these firms are not indian, they aren’t listed on Indian stock exchanges, thereby restricting indian investors from directly investing in these stocks.

In India, there are quite a few large brokerage houses that have a tie-up  with the foreign brokerage houses to allow investors from both the countries to invest in each other’s listed companies. In addition to this, there are certain brokerage houses in foreign countries that allow indian investors to directly set-up an account with them and trade in their equity securities. The latter method reduces the transaction costs, as there is one less middleman to pay.

• International Mutual Funds or Exchange-Traded Funds

To gain access to foreign stocks, you can also choose to invest in indian exchange-traded funds or mutual funds that hold foreign securities. International mutual funds/etfs collect money from numerous investors and invest the collected corpus in global equities, after thorough research of the foreign economy, exchange rate predictions, and future market outlook of the invested firm.

This is a rather easy way to invest in global equities as opposed to investing through brokers. It involves lesser transaction costs compared to investing in individual stock through a broker, and one can benefit from the professional expertise of the fund manager. Also, investors do not need to invest a large sum of money, which makes them suitable for amateur investors as well.

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Benefits of Investing in International Markets

• Diversification

Experts recommend that investors should hold few foreign stocks in order to truly diversify their investment portfolio. This not only immunes the portfolio from the turbulences in the domestic market, but also gives an opportunity to leverage the profitability of foreign firms and be a part of global economic growth.

• High Returns

It is a well known fact that a good number of firms in the foreign market report higher profits than their indian counterparts; big tech giants such as Google, Microsoft as well as e-commerce seller Amazon, to name a few. With your capital invested in these firms, in addition to other high reward stocks, you can increase the overall capital gains of your portfolio. Foreign markets offer you an opportunity to earn high returns.

• Risk Mitigation

A section of financial experts believe that if your portfolio is limited to investment instruments pertaining to the single market, sooner or later, it is ought to lose. This happens because a collapse in one sector in a domestic market can trigger a series of shutdowns and collapses, and send the economy in a negative spiral. At this time, if the investor is exposed to foreign investment instruments, the risk of capital loss is minimised. The foreign economy might not be in such a bad shape as the domestic one, or for the matter of fact, might be performing better than the latter, which reduces the overall risk of investment portfolio.

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Disadvantages of Investing in Foreign Markets

• High Transaction Costs/Expense Ratios

Investment in foreign stocks carries high transaction costs, no matter which method you choose for investment. If one invests through brokerage firms, s/he needs to pay a hefty fee to gain access to the foreign market and equities. If one chooses to invest in foreign markets via mutual funds that invest in global equities, s/he has to incur higher expense ratios as opposed to when one invests in mutual funds investing in domestic securities.

• Exchange-Rate Volatility

One of the major drawbacks of investing in international markets is exchange rate volatility.  When you invest in a foreign stock, you are essentially investing at the currency exchange rate for that particular day. If your currency remains stable, or appreciates against the foreign currency, and the invested stock profits, there is nothing to worry. However, the problem arises when your currency depreciates against the foreign currency, because now, this reduces your total capital gains post conversion.

Taxation on International Investment

In India, capital gains from investment in foreign stocks, or international mutual funds are treated like those from debt mutual funds. If the principal  investment along with capital gains is withdrawn before 3 years of investment, Short Term Capital Gains tax would be levied as per the income tax slab of the investors. If the holding period is more than 3 years, Long Term Capital Gains tax of 20% would be levied post indexation.