Prior to 2004, Indian residents required approval from the Reserve Bank of India (RBI) every time they sent money overseas because the RBI wanted to limit capital outflow.
The RBI was concerned that excessive outflow of money would destabilize the rupee and make it lose value. The RBI feared that if everyone starts selling rupees and buying USD, the value of the rupee would fall and the value of the dollar would increase.
Since India’s economy heavily relies on imports which are paid in USD, the prices of everyday goods would go up and destabilize the economy.
However, the RBI realized that open cross-border flow of capital is important for economic growth. Therefore, in 2004 the RBI instituted a new policy to relax capital outflow control.
This new policy is called the Liberalized Remittance Scheme (LRS). Under the LRS, individuals can send money across borders without seeking approval from the RBI.
We spoke to Rajesh Cheruvu, Chief Investment Officer, Validus Wealth, and he gave a holistic perspective on what LRS is, and nuances of global investing:
The LRS has made it easier for Indian residents to study abroad, travel, and make investments in other countries.
Over the years, the limit for such remittance has fluctuated from USD 75,000 per annum to USD 250,000 per annum. The LRS limit can be availed for both current account transactions like travel, education, healthcare etc., and for capital account transactions like maintaining a foreign bank account, investments, purchase of property abroad, etc.
With growing income and wealth, India has indeed seen a steady rise in remittances under this scheme. It was not until 2015, there was a sudden burst in amounts being remitted, at an astounding growth rate of close to 80% year-on-year.
While travel, education, and maintenance of close relatives are the categories that dominate the composition of funds remitted, capital account transactions like remittance for investments and deposits have been consistent throughout.
In these abnormal times, remittances have indeed reduced but remittances for investments have continued the upward trend.
The fact that global markets took a hit during this period, in fact, has encouraged resident Indians to take advantage of such a correction and thus start investing in other markets, if not build on their existing investments offshore.
The affluent clients are consumers of some of the most well know technology and consumer durable companies.
The rise in stock prices of some of the world’s largest companies over the last couple of years, their reach across the globe, and the in-person experience of having used their services, have fueled investors’ aspiration to be a part of their growth.
In today’s age and time, with the free flow of information about global markets, investors have witnessed the growth opportunities other markets make available.
Geographical diversification in one’s portfolio is also being understood as an important aspect of building a robust portfolio.
While investing in global markets might be a new investment avenue for most, one should not deviate from the basic principles to be followed.
A portfolio must be envisaged keeping in mind the usual parameters like the individual’s investment goals, investment time horizon, risk appetite, liquidity requirements, and other aspects to be considered.
Asset allocation as per the market scenario is also the key to starting well. For instance, given the extremely low-interest rates globally, there are very few options to consider for debt allocation.
Over and above, any increase in global interest rates will probably result in capital erosion. So, looking for suitable alternatives for debt allocation within a portfolio is crucial.
A) Global Equities:
Equities tend to be the preferred asset class for most Indian investors when it comes to global investing. We have seen the domestic mutual fund industry evolve over the last two decades, as it became the preferred route for equity investors, especially for retail & affluent investors.
When it comes to global investments, we believe passively managed, Exchange Traded Funds are a more efficient way to invest in equites. This avenue is extremely popular, especially when it comes to developed markets.
The assets under management for some of these ETFs are a testimony to that. What makes them attractive is the ease at which investments can be executed, just like stocks.
The expense ratios of these ETF can range from 0.03% to 1.00% depending on the sectoral or geographical exposure and the execution charges or brokerage to invest into these ETFs tend to be very low, like stocks.
What has contributed to the popularity of passively managed ETFs is the fact that active managers have consistently failed to outperform the markets over long time horizons, especially in developed economies where market tends to be a lot more efficient.
C) Long-short Funds:
For more evolved investors, there are long-short funds available which do tend to give the investors the desired equity exposure, in a risk-adjusted manner.
Such funds are supposedly better equipped to deal with market volatilities since they have the flexibility to take short positions if they have a negative view of the market or specific stocks.
Do note, such funds do take exposure to the market through simple or sometimes complex derivative market instruments and hence tend to fall in a higher risk category. Investors will be advised to understand the various risks associated with such funds before allocating money to them.
D) Alternative Investment Avenues:
Global financial markets are a lot wider and deeper for each asset class. This can be witnessed even more so when it comes to alternative investment avenues.
Alternative investments can range from art, insurance, royalty discounting or even legal litigation financing. Some of these alternative investments have near-zero correlation to traditional equity or debt markets and thus are termed as market neutral.
As exotic as they might sound, some of these have done exceedingly well and the value addition of these investments to a portfolio can be witnessed over a period and especially during periods of turmoil.
As one may presume, alternative investments are considered a lot riskier compared to traditional asset classes like equity and debt because they do tend to have limited liquidity, compared to them.
Emergence of Number of Investment Platforms:
The increased interest in global investing among resident Indians has seen the emergence of a number of investment platforms facilitating global investing in India over the last couple of years.
Most, if not all these platforms tend to have interfaces that are enabled by an international broker at the backend. These platforms tend to be extremely efficient in terms of pricing and execution, thus making the whole experience seamless.
One thing peculiar to most of these investment platforms, tends to be the fact that they provide access to predominantly the listed US market, and only a few like tend to provide access to markets across the globe.
MF Investment in Global Markets:
Traditional investment avenues have also taken note of the increasing interest in global markets and there has been a surge in the number of mutual funds which invest in global markets in the form of feeder funds.
Effectively these funds invest in funds domiciled in regions outside India, which in turn invest in global markets.
Such offshore funds tend to have a substantial track record in terms of performance and assets under management, which makes the whole proposition attractive, especially to retail investors who are keen on taking global exposure with smaller investment amounts.
Once again, funds investing into US markets tend to dominate the space, though this seems to be changing in the recent past. The added structural layering in this does add some additional pricing to investors.
An important point which investors should take note of while investing in global markets is the differentiated tax treatment of offshore investments, depending on the investment product, structure, and investment route.
The taxability in terms of time and rate, tends to be different from what is applicable to domestic investments into the same asset class. It will be prudent for investors to consult their tax advisors, to understand the finer details before arriving at a conclusion.