Gearing up to build a global investment portfolio – options, regulations & best practices
Investment

Gearing up to build a global investment portfolio – options, regulations & best practices


In this column two weeks ago, we read why it becomes obvious for Indian investors to allocate at least a small portion of their portfolio to overseas markets. Today, we extend that discussion to some of the execution-related aspects of achieving global portfolio diversification.

Before starting to build an overseas portfolio, investors should assess their specific needs from this pot: Are you doing this purely for diversification benefits or do you need to build a foreign currency nest for lifestyle goals in the future? Are you just starting out with global diversification or are you experienced enough to evaluate differentiated ideas?

Basic global diversification vs building $-denominated nest egg: For someone looking for basic exposure to the major global indices like the Nasdaq or S&P500, or mutual funds abroad, it may be enough to invest in domestic mutual funds (called feeder funds) that invest in funds domiciled outside of India or foreign securities. These are easily accessible over your friendly mobile investment app, just like other domestic mutual fund. These also do not require you to set up overseas brokerage accounts or remit dollars overseas. From a simplicity perspective, this is a great option. However, despite around 60+ funds in this space, the options reduce when you try to bucket them into country, industry segment and asset class categories. Moreover, regulators have capped the feeder funds’ foreign investment to $7 billion in total, placing restrictions on them.

While the above can help with basic global portfolio diversification, as the amount is invested in India in a rupee portfolio, it does little to help build a long-term, foreign currency nest-egg overseas. It also fails to provide access to a wider range of global investment options. These objectives can only be fulfilled by remitting and investing capital overseas. India does not have full capital account convertibility yet, which means we cannot freely convert rupee / rupee-based assets to foreign currency assets today. There are stringent regulations around this. But this does not mean that Indians cannot make foreign investments.

Complying with Overseas Investment Regulations: Under RBI’s Liberalised Remittance Scheme (LRS) route, each Indian resident can remit up to $250,000 every year overseas, towards various eligible purposes, including making investments overseas. In August 2022, the RBI updated its Overseas Investment Regulations, providing further clarity on the types of investments that can be made by both Indian residents and entities. Indian residents can freely make overseas portfolio investments (OPI) in foreign securities, as long as certain conditions are met. Positive changes have also been made to the Overseas Direct Investments (ODI) regulations, offering more leeway for Indian entities to invest overseas. Investors are advised to consult regulatory experts, especially if their overseas investments are unlisted / complex.

Choosing the right investment platform and adviser: Once investors or their family entities are ready to start investing overseas in a compliant way, the next big thing is to think about how to go about making specific investment decisions.

One could perhaps start investing with a simple overseas trading account, either through a domestic brokerage or a foreign one. A good number of digital platforms today allow Indian investors to invest in listed securities abroad using the LRS route. These are great if one is looking for quick execution, but may sometimes fall short when it comes to offering high quality, tailored investment advice. While some trading platforms also seem to offer investment advice, generally they are incentivised by product or transaction commissions. If that is the case, they may not always align with your interests.

There is some merit in working with an investment adviser who has presence (preferably regulated) and expertise in the offshore market. Competent advisers also have strong sourcing and manager/investment selection abilities in their local market. Working with advisors has the added benefit of tapping into their network of experts on matters related to cross-border taxation, estate and succession planning, etc., in the foreign market. As usual, costs play a big role in who you decide to work with, as do tax implications of the investment being made.

While paying an advisory fee may feel unusual at first in a commission-driven market like India, it is important to remember that good advice will more than pay for itself over time.

(The views expressed in this article are personal .)

Shilpa Menon is senior director-India at LCR Capital Partners.

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