Why more Indians should invest in global equities, but do not!

One common question that I frequently get asked is if we as Indian residents can invest in global equity markets.

As an equity investor whose day job is to allocate capital, I am often surprised at this unfamiliarity or lack of awareness, a number of funds have recently sprung up offering Indians limited exposure to foreign equities but it remains a very small segment of the overall market for investments.

Many Indians, however, have taken a strong liking towards domestic equities. Interest rates have remained low and would probably remain so for some time.

This has created a dearth of fixed-income investment options. The Indian stock market has not disappointed and has generated bumper returns for many, with over 25 million new Demat accounts in 2021.

An individual invested in any domestic index fund would have made a return of more than 50% over the past two years.

My hunch is that over a long-time horizon, anyone invested in Indian markets should do reasonably well.

Volatility in the Indian stock market should open up opportunities for skillful investors but this also begs the all-important question - should you put all your eggs in one basket or if I may say – should you invest only in Indian stocks?

Diversification purely as an end-goal should never be pursued but there are some extraordinarily dominant and highly resilient companies worth investing outside the Indian equity market.

In fact, if one were to make a list of the world’s top ten companies not just in terms of market capitalization but also in the sheer quality of the business, one would be hardpressed to find an Indian company on it.

Even if one goes beyond this cursory list, there are hoards of quality businesses listed in different stock exchanges across the world.

Thankfully, quite a few are now opening up to this reality of investing in foreign markets. There is certainly a growing appetite as evidenced in an increase of 28% in foreign investments (includes both equity and debt) by Indians in 2021.

Not just that, SEBI is now seriously considering increasing the overseas investment cap for domestic mutual funds.

This should open up more options for those looking at alternatives to Indian equities. However, despite the shift in momentum, there remains only a fraction of Indians who have warmed up to the possibility of investing overseas.

As consumers of various American/European companies, Indians happily spend both their precious money and time on many of their products/services.

What then is stopping many from investing in stocks outside India? To my mind, there are a number of reasons why this has happened.

One, many are just genuinely unaware and consider investing overseas something that is beyond their reach.

In simpler words, their financial advisors haven’t done a great job of explaining how easy it is to set up an international brokerage account.

Second, there is a general skepticism towards foreign markets and people are quick to disregard this option as non-serious.

They are fearful of permanent loss of capital even though the same individuals may be invested in sub-par companies in India.

Third, the Indian state in a way discourages from remitting capital abroad beyond a certain limit.

Under the Liberalized Remittance Scheme, an individual can only transfer up to $250,000 per year for equity investments. This isn’t exactly prohibitive but for HNIs this isn’t liberal enough.

During those rare massive market dips, this limit probably acts as a major spoilsport. Finally, the taxation for foreign equities is not just highly inefficient but is also excessive.

STCG tax for foreign equities is charged at par with one’s income tax slab while LTCG tax only kicks in if security is held on to for a minimum of two years (at the rate of 20%).

In contrast, LTCG tax for domestic equities is charged at 10% and that too for a holding period of one year.

This tax discrimination between foreign & domestic equities is difficult to make sense of and should really be done away with for the benefit of individual investors.

Fortunately, the Finance Minister has shown agility and flexibility with regard to the reduction in corporate tax rates.

A large number of voters would be thrilled if that same urgency were applied to personal income tax reform.

Many more Indians would be more open to investing in the world’s greatest businesses and the process enriching themselves and their families.

THE VIEWS EXPRESSED BY THE AUTHOR ARE PERSONAL