Pros of Investing in Foreign Shares

Diversification across and within different assets is as close to a free lunch as you can get in investing. It reduces the correlation of risks. In equities also diversification improves the risk-adjusted returns. That is why it is recommended that you split your equity allocation to at least ten stocks if not more. Likewise, diversification can also be done across geographies which will reduce country-specific risks.

If you were a person, let’s say in a country like Pakistan or Sri Lanka, you would lose a lot of your purchasing power if you invested in your home stock market only. Given the geopolitical risks, diversification across geographies is highly recommended. So, if the stock market of one country falls you may not be affected that much. In India also, people are getting interested in investing in International Stock Markets, particularly in the U.S. which is the largest market with world leaders like Amazon, Microsoft, Facebook, Apple, etc.

Investing in international stock markets also gives you wide exposure to sectors and stocks which may not be present in the Indian stock market eg. high-tech companies like Nvidia, biotech companies like Amegen, etc. You can also invest in exotic sectors like Artificial Intelligence, Marijuana, Robotics, and commodities like uranium.

Cons of Investing in Foreign Shares

There are definitely benefits of putting a part of your portfolio in foreign stocks but there are some issues as well that you should be cognizant of:

i) There is foreign exchange risk since if the currency of the stock in which you invest depreciates against the India Rupee you will lose money.

ii) There are cumbersome taxes, regulations, and high transaction costs related to direct international equity investing. The government has recently increased TCS (taxes collected at source) to 20% for foreign investments. Also, there is a limit of $250,000 a year on remittances.

iii) You also need an international brokerage account plus also consider foreign country commissions.

Also, read Why Trading in F&O is Like Burning Your Money

Conclusion

One way out is to invest in domestic mutual funds/ ETFs which are focused on foreign stocks like the Mirae MAFANG ETF or Motilal Oswal NASDAQ Fund. However, these are subject to higher transaction costs as well as RBI restrictions. Also, choices are restricted. While investing in foreign shares is good in my view, the government creates hurdles in the form of regulations and high taxes to prevent capital outflows from India.