Rationale for Investing in International Assets
Having some part of your investment portfolio allocated to international assets, have very strong diversification benefits from a portfolio construction perspective. We provide below some of the core reasons why we believe having exposure to international assets have clear benefits from a portfolio construction perspective:
Benefits of International Investing
True-Diversification
Regardless of how diversified your fund portfolio is in terms of categories, it can still have a 100% concentration to growth of a single economy (Level 4). There are many factors (wars, geopolitical, political, currency) that can have a large adverse impact on a single economy. Adding geographical diversification to your portfolio, helps reduce single country-risk.
Exposures to specific global trends
There are various trends that drive longer-term economic growth, and these factors tend to differ across economies. Investing internationally can provide you exposure to specific value-creating trends (such as semi-conductors, EVs, global tech firms etc) where strong investment options are not available in India.
Currency Diversification
For many families, there may be certain expenses that are expected to take place in global currencies (overseas education for children, international vacations, overseas retirement etc.). A sharp depreciation of the rupee can adversely impact the ability to meet such forex expenses. Investing overseas gives you exposure to foreign currency assets, protecting your portfolio & financial goals against substantial rupee depreciation.
Larger-range of Investment Options
Investing is the art of balancing growth, quality & valuations. Each global market trades at different valuations, based on respective growth outlooks. Investing overseas opens up a range of more attractively valued markets or markets/specific themes with a higher growth potential.
Different Options for International Investing
There are many different options for investing overseas, each of which have their own set of pros & cons. We provide below a brief overview of each of these investment options, and their level of suitability for different types of investors.
Option 1) India-based International Feeder-Funds
International feeder funds in India, are essentially India-based mutual funds that invest exclusively in international assets (overseas ETFs/MFs/securities). You get all of the benefits of international asset exposures (investments in overseas assets & currency diversification), without any of the operational complexities of other options.
- Simplest route to investing overseas: Investments are identical to investing in any local mutual funds. There are no implications to investors in terms of opening overseas accounts, remitting money overseas, dealing with global tax & regulatory implications etc.
- All benefits of international exposures: You get the benefits of international asset diversification, investments held in foreign currency and a large range of international asset options to choose from.
- No remittance limits: There are no remittance limits that apply, and you can choose to invest as much as you desire.
- No inheritance tax exposures: Investing directly overseas, can often lead to investors inadvertently exposing themselves to international inheritance taxes (especially US or UK). There is no risk of exposure to international inheritance taxes, while investing via Indian feeder funds.
- Cannot customise portfolios at a stock-level: Feeder funds can provide exposures to specific regions, economies & trends within particular economies. However, you cannot control specific stock exposures via a feeder fund.
- Assets legally remain in India: There are certain certain situations where there may be value for an investor to have the funds legally outside India - this can include to protect against the risk of capital controls in the future, safeguard against policital/other such risks or the need to build an investment corpus held overseas.
This is what is our default recommendation, with the exception of the following cases:
- Foriegn citizens & Foreign Corporates
- NRI's operating out of countries with no capital gains tax OR countries without a double taxation avoidance treaty with India
- Resident Indians who desire to build assets that are legally held outside India
Option 2) Direct Investing Overseas via Overseas Brokers
Many Indian brokers have launched an option for their investors, to invest directly in overseas securities via a tie-up with an international broker (typically Interactive Brokers or Stockal in the US). The Indian brokers are basically facilitators to help you open an overseas brokerage account.
- Ability to control portfolio construction: You retain the ability to control the specific stocks that you invest in, allowing deeper portfolio customization.
- Assets are legally held outside India: Helping protect larger business families from adverse capital controls or political risks in the future.
- Substantial risk in case of death of the investor: In case of the death of the investor, 40% of all assets held in US assets above $60,000 are lost to the US government via estate-duties. Additionally, many brokers require a probate to be done in the US by a US-lawyer, in order for assets to be released to beneficaries. Attempting to avoid estate duties by redeeming assets without informing the broker, can potentially expose your beneficiaries to substantial legal liabilities.
- Risks of bankruptcy of the overseas broker: Unlike India, in the US your assets do not lie in your own demat account, but lie in a common broker custodian account pooled along with other investors. It is however important to note, that these broker custodian accounts are clearly demarcated as client money (as seperate from the brokers money), and are typically insulated from bancruptcy risk. In addition, in the US a $500,000 SPIC insurance for each investor helps further reduce this risk.
At IME , we have a tie-up with a Singapore-based advisory platform, that gives investors a wide range of investment options, including funds which help investors avoid estate duty risk. This Singapore-based advisory platform is our preferred route for international exposures for the following types of investors:
- Foriegn Nationals & Foriegn Corporates
- Resident Indians wishing to hold assets legally outside India
- NRI's that are tax-resident in countries with NO Capital Gains tax OR with no double tax avoidance treaty with India
Option 3) Using International Fund Structures to directly invest overseas
There exist a wide-range of international fund/trust/company structures, that allow you to invest in overseas assets via a perpetual legal entity (avoiding exposures to estate taxes) in a jurisdiction with minimal tax & compliance implications. This is clearly the best route for investors seeking to invest directly overseas, but it does have cost implications that typically make it viable only for larger investment sizes (minimum of $5 mn).
- Ability to control stock-selection: You retain the ability to control the specific stocks that you invest in, allowing deeper portfolio customization.
- Assets are legally held outside India: Helping protect larger business families from adverse capital controls or political risks in the future.
- Protection against estate-duties: Since investments are held via a perpetual legal entity, there is no question of the demise of the investor (i.e. the perpetual legal entity)
- Ability to choose favorable jurisdictions to hold your investments: That have minimal tax, regulatory & compliance requirements.
- Cost-implications: Setting up an investment vehicle overseas, would entail a minimum annual expense of over $17,500 (can be considerably higher depending on the choice of jurisdictions, structures etc.). For a $5 mn investment value, the cost of only operating the structure works out to 0.36% of AUM (which is why these structures are only suitable for larger investors.)
- Set-up Complexity: There are multiple decisions that need to be considered to identify the most suitable investment vehicle to use. This includes the choice of jurisdiction, the choice of structure within a jurisdiction and the appointment of custodians, fund accountants & bankers. A good advisor can hand hold you through the entire process and manage most of this complexity for you.
- Need to appoint global advisors: In terms of fund accountants, lawyers for compliance requirements, bankers & custodians. There exist full-serviced providers who help provide a one-stop shop for all of these regulatory & other requirements.
At IME Capital we have tie-ups with specialist advisors who can help with the formation & management of such international structures.