Indian residents can invest up to $250,000 per year in foreign stocks, bonds and ETFs. Making the money transfer to the foreign broker has traditionally involved a bank branch visit. However, fintechs in this space are gradually easing up the process by offering pickup and drop services for transfer forms. In addition, banks such as ICICI Bank allow a completely online process for transfers up to $25,000—10% of the total liberalised remittance scheme (LRS) limit.
Investment in international stocks has been looking attractive over the past year as Indian markets have underperformed their US counterparts in a big way. The Nasdaq is up about 24% in the past one year and close to its all-time highs. This is sharply in contrast to a 23% decline in the Sensex (as of 29 May 2020). According to the Reserve Bank of India (RBI) data, Indians remitted $431 million ( ₹3,258 crore) for investment in foreign stocks and bonds in FY20. This was slightly higher than the $423 million remitted in FY19 despite the sharp depreciation in the Indian rupee against the US dollar, which has moved up from 69.8 to 76 a dollar.
“Current account transactions (fees, healthcare and family maintenance) are mostly online across the board. Banks have limits from $10,000 to $25,000 on these. Capital account transactions (used for investing) are not online right now, except for with the ICICI Bank. We digitize the capital account bit (investing) to a great extent by generating the automated-filled-customized documentation online when someone wants to fund their Stockal account. Then we schedule a pickup and deal with banks to get the processing done. In this, if a customer has an ICICI Bank account, we enable him to do it 100% online,” said Sitashwa Srivastava, founder and CEO, Stockal, a fintech player focusing on international investment, which has a tie up with HDFC Securities.
Simply going online does not automatically reduce costs. “For forex remittances there’s a fixed cost component which ranges from ₹500 to ₹1,500. There is also a markup for currency conversion which ranges from 0.5-2% of the amount transferred, depending on the bank and the relationship we or the customer has with the bank,” said Viram Shah, founder and CEO, Vested, a US-based fintech firm focusing on advising Indians on foreign stocks and ETFs. Vested is a Securities and Exchange Commission (SEC) registered investment adviser. For small amounts, such as $25,000 or less banks simply offer a standard rate, which cannot be negotiated.
A second element of international investing is KYC under the laws of the foreign country where the brokerage or intermediary is located. Swastik Nigam is founder and CEO of Winvesta another fintech in this space regulated by the UK’s Financial Conduct Authority (FCA). He says that their KYC can be done entirely online through standard government identification such as Aadhaar and PAN. Srivastava whose firm is governed by the US laws also confirmed the wholly online nature of this second leg.
International diversification is an important part of risk reduction in an investor’s portfolio. As fintechs and banks ease up this process, your ability to do this is enhanced. Keep a close watch on the transaction costs (such as currency conversion), reputation of the foreign broker and the regulations involved. Budget 2020 also imposed a 5% tax collected at source (TCS) on foreign remittances above ₹7 lakh although this can be offset against your other tax liability (from sources like salary, business or capital gains).
The TCS has been deferred to 1 October and banks will collect this TCS at the time of transfer. You can find out more about international investing here bit.ly/2TPVWFe.