Is the time ripe for Indian investors to invest in the shares of foreign tech companies?

Not too long ago, many Indians took to investing abroad as stocks of tech firms like Meta (Facebook), Alphabet (Google) and Netflix, among others, hit record highs. It was in the midst of this euphoria that India’s capital markets regulator, the Securities and Exchange Board of India (Sebi), had to step in and stop mutual fund (MF) companies from taking fresh subscriptions in international schemes on account of crossing the regulatory limit of $7 billion for overseas investments.

However, the story soon changed when high inflation and recessionary fears in some developed economies sent their stock markets on a downward spiral. Sample this: Nasdaq in the US, China’s Shanghai SE Composite Index and Germany’s DAX fell by 34 per cent, 15 per cent and 12 per cent, respectively, in CY22. The crash in the global markets was so steep that Sebi again allowed MFs to invest in foreign stocks due to the headroom that became available. However, after underperforming over the past year, international MFs have again started rallying. Consider this: over the past one year, international funds have delivered an average negative return of 4 per cent. However, over the past three-months they have given an average return of 13 per cent, according to Value Research (as on February 10). With no increase in the investment limit by the Reserve Bank of India (RBI), recently Edelweiss Mutual Fund and Kotak Mutual Fund have decided to temporarily suspend subscriptions to their seven and one international-focussed MFs, respectively.

So, a good question to ask now is this: is it a good time to invest when international markets have started looking attractive again? Take for instance, the S&P 500 Index, currently trading at a price to earnings (P/E) ratio of 19.72x compared to 25.96x a year ago, and 40x two years ago. Individual stocks such as Alphabet, Tesla and Meta have also fallen sharply by 25 per cent, 43 per cent and 50 per cent, respectively, over the period of one year (as of January 30, 2023).

Experts say this provides an opportunity to buy international stocks at lower prices as their fundamentals still remain strong. Moreover, overseas investing ensures that investors don’t put all their eggs in one basket, and provides their portfolios with the much-needed geographical diversification, especially when India accounts for just 3 per cent of the world’s market cap.

“Investing internationally works well because of diversification. Investors gain by having some of their portfolios outside their country as international markets or the US markets move in very different directions compared to Indian markets. And that provides a lot of flexibility to a portfolio,” said Pratik Oswal, Head of Passive Funds at Motilal Oswal Asset Management Company (AMC) at BT’s Market Today Summit recently. He added that the fact that Indian markets were resilient last year and the US markets weren’t, showed that diversification “does play out really well”. While the Nasdaq fell by 33 per cent in 2022, the Nifty 50 gave a return of 5 per cent.

An important point to keep in mind is the proposal made by Finance Minister Nirmala Sitharaman in Budget 2023-24. Per the proposal, from July 1, 2023 onwards, if you convert the rupee to any other currency for investments abroad, then 20 per cent of the amount will have to be set aside as tax collected at source (TCS). Currently, TCS of 5 per cent is levied on foreign outward remittances above Rs 7 lakh.

Attractive Valuations

So, should investors cash in on the cheap valuations? “Last year wasn’t easy for tech stocks. Do these themes still make sense? I think they do,” says Radhika Gupta, MD & CEO of Edelweiss Asset Management. “When we sold international investing, we had been proponents of this in 2016-2018. One of the things we said was that this belief was nonsense that just because Nasdaq made money for every year last decade, it will never lose money. Second, diversification means that there will be years when India does well and these countries do badly, and you can’t get hyper about it. You just need to find the right asset allocation,” she adds.

Experts believe that while sailing in overseas waters, it is essential to differentiate between mature tech and new-age tech firms. “During Covid-19, we saw a lot of these companies go up, obviously because interest rates were too low and, hence, funding was easy. But on the other side were the mature tech firms such as Google, Facebook, Microsoft; they do have fundamentals, are profitable, and they are growing well. And if you see over the past 20 years or so, a 20-30 per cent fall in tech stocks is not uncommon. So, I would differentiate between the two; I’m not too confident about the new-age tech firms, but I’m very confident about the mature tech space,” said Neil Parag Parikh, Chairman and CEO of PPFAS AMC at the Market Today Summit. He added that the mature tech space is stable, and it provides a good entry point for international investing.

So, should one invest in international MFs now? “There is no further update. What you are allowed to do is take money, net of redemptions. So, depending on each individual fund’s situation, we are taking money via SIPs, and we’re doing so in compliance with guidelines. In fact, we are seeing people starting SIPs in funds like Greater China at lower levels. Different industry players are taking very different stances. We want to request the RBI to look at enhancing these limits,” says Gupta.

Future Forward

So, which route is better—investing directly or through MFs? The cost of investing directly is high. Hence, if your portfolio value is large and you have the time to devote to analyse and track foreign stocks, then you can consider investing directly, say experts. Here, investments are made by using the liberalised remittance scheme (LRS) of the RBI, which is available to all resident Indians. Through this scheme, an individual can remit up to $250,000 per financial year for such transactions.

Otherwise, for small investors, the most efficient way to invest abroad is to buy a passive international fund as it is cheaper and hassle-free. One doesn’t need to have an overseas broking account, as there are many international schemes that are available in India. The biggest advantage of these funds is that you can invest in rupees without getting into the hassle of remittances and forex charges. So, for the uninitiated, it is always good to make an entry in a staggered manner with 10-15 per cent of equity investment to be allocated to overseas funds. Once you are comfortable with these funds, you can explore further by investing directly in foreign markets, the experts add.

Another aspect to keep in mind while investing directly in foreign markets is capital gains tax, as generally, international investors churn their portfolios a lot. In the case of international MFs, just like debt funds, if they are held for three years or more, long-term capital gains (LTCG) attract a tax rate of 20 per cent after indexation benefit, whereas if they are held for less than three years, short-term capital gains (STCG) is taxed as per their tax slab.

If you invest directly in foreign equities, LTCG tax rate of 20 per cent (plus applicable surcharges and cess) is levied on gains made on them if held for over 24 months. If the investment is held for less than 24 months, then STCG is levied as per your income tax slab. Moreover, dividends are taxed in the US at a flat rate of 25 per cent. The broker paying the dividend subtracts the tax before distributing the remaining profits. However, one can claim credit for the dividend tax paid when filing taxes in India.

Last but not the least, it is advisable to take the plunge after understanding the costs involved in foreign investing if you are investing directly. For small investors, overseas MFs could be the best route to diversify your portfolio. In the end, it is always a good idea to be on the lookout for greener pastures, whether domestic or international.

@teena_kaushal