Mutual funds and other easy ways to invest in global markets

With growing economies and markets across the world, a lot of people are looking to invest beyond their geographical boundaries. Such international investments aid in diversifying portfolios, allowing investors to put their money in world-famous companies across technology and other conventional businesses. However, investing in global markets can go wrong if you are unaware of some of the best practices.

Here are some simple ways for not only those who have already been investing in the domestic markets and are aiming for foreign stocks but also beginners who want to start putting their money in global markets.

And as the famous American entrepreneur and author Robert Arnott once said, “In investing, what is comfortable is rarely profitable,” there are risks involved when it comes to global investments as well. So, both new and seasoned investors should factor in some risks that come with opting for such techniques to maximise wealth.

Risks to consider before international investments

Geographical risk

Before venturing into an overseas investment, one should take into account relationships between the two countries, like macroeconomic considerations (unstable political conditions, unfavourable legal reform and fluctuating interest rates), and geo-political risks.

Volatility

This risk is associated with the magnitude of variations in a stock’s value. According to the rule of thumb, the higher the volatility, the riskier the stock, and vice versa. As a result, from an investment standpoint, stronger established markets with lower volatility typically do better. Measuring volatility risk is crucial because it will help you decide how and when to invest in a specific market sector.

Foreign exchange fluctuations

The propensity of instability between one’s home and foreign currencies, such as the US dollar with respect to the Indian rupee, is known as foreign exchange fluctuation. When setting target returns, any risk of foreign exchange volatility should be considered since it could result in either profit or loss for the investment.

Here are some easy ways for investments in international markets

Direct investment

Several investors in India keep a close eye on international large-cap companies, such as Apple, Microsoft, Google and Netflix, to invest in them at the right time. But to do so directly, they can either open an overseas trading account with a foreign broker or with a reputable Indian broker who partners with foreign brokers.

However, without a special permit, an individual can invest up to USD 2,50,000 (or INR 2,05,00,000) in one financial year. Additionally, a 5 per cent Tax Collection at Source (TCS) is required for investments over INR 7 lakh. But the Double Tax Avoidance Agreement allows investors to claim a tax credit for the tax paid in the US on long-term capital gains and dividends.

This, however, can be risky for those new to investing in international markets and monitoring a company’s progress. So, beginners should seek professional guidance before venturing into such investments.

Global mutual funds

Another option for those who want to invest in international markets is overseas mutual funds. This can be done in two ways — by investing in foreign stocks through an Indian fund or a global fund. Additionally, investors can opt for Index funds with holdings in international indices like the S&P 500, NASDAQ 100 and Russell. This is a passive way to invest in international equities.

Withdrawals from these global mutual funds will take at least five days, or T+4 business days (T-day is when the request for redemption was received), to reflect in the investor’s account. Additionally, investors should keep an eye out for exit loads on these funds, which can be a bit higher than those on domestic funds.

This method is suitable for those who have little expertise in international stock markets and want to broaden their investment portfolio.

Exchange-Traded Funds (ETFs)

A more convenient option than putting together your own stocks or mutual funds’ portfolio, international ETFs give investors easy access to overseas markets.

For the unversed, ETFs are pooled investment securities that often follow a certain sector, index, commodity, or asset. They function similarly to mutual funds but contrary to the latter, ETFs can be bought or sold on a stock exchange, just like conventional stocks. While some ETFs offer exposure to several markets, others are country-specific. Several alternatives are available through Indian mutual funds that fall under the category of global ETFs.

American Depository Receipts (ADRs)

Another easy approach to purchasing overseas stocks is through American depository receipts (ADRs). Similar to shares of corporations in the US, these ADRs are listed, traded and settled on exchanges. As a result, they provide the typical investor with an accessible way to hold overseas equities.

The NYSE, AMEX, Nasdaq and over-the-counter markets are among the American exchanges where ADR stocks can be traded. Investors can use any stock broker, as ADRs function similarly to conventional stocks.

Global Depository Receipts (GDRs)

Global Depository Receipt (GDR) is one that is issued by a depository bank that buys shares of overseas corporations. GDRs are a way for Indian companies to list their shares on overseas exchanges. It is a tradable instrument with a foreign currency.

Shares of foreign corporations are issued by a depository bank and made accessible to investors both inside and outside the United States on international markets.

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