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Global investing: Wait and watch

Feb 25, 2004

Indian investors have never had it better as far as avenues of investment are concerned. The Reserve Bank of India (RBI) has allowed all resident individuals to invest upto US$ 25,000 for any purpose. This means that overseas investments that have been denied to Indians for a long time now, will be allowed to the extent of US$ 25,000. Indian citizens can use the US$ 25,000 for various purposes like:

  • For any current or capital account transactions or a combination of both.

  • To acquire and hold immovable property or shares or any other asset outside India.

  • To open, maintain and hold foreign currency accounts with a bank outside India.

This facility is in addition to those already available for private travel, gift remittances, studies and donations i.e. you can remit US$ 25,000 per annum over and above the remittances that are permitted under any other exiting guidelines. What does this new directive from the RBI mean for the retail investor? Is the retail investor likely to benefit from the same?

Before we go on to the benefits, if any, let us first consider the rationale for the same. The first principle of investment is that 'do not put all your eggs in one basket'. By allowing Indian citizens to invest in global markets, there is a clear diversification. As Mr. Ajit Dayal, CIO, Hansberger Global Investor puts it, "I dare say that over the last thirty years period, in a US dollar adjusted basis, probably the rate of return that you earned from investing in the US would be the same as investing in India. So, although the Indian investors have never had it better as far as avenues of investment are concerned. The RBI has allowed all resident individuals to invest upto US$ 25,000 for any purpose. This means that overseas investments that have been denied to Indians for a long time now, will be allowed to the extent of US$ 25,000. Indian citizens can use the US$ 25,000 for various purposes like:

  • For any current or capital account transactions or a combination of both.

  • To acquire and hold immovable property or shares or any other asset outside India.

  • To open, maintain and hold foreign currency accounts with a bank outside India.

This facility is in addition to those already available for private travel, gift remittances, studies and donations i.e. you can remit US$ 25,000 per annum over and above the remittances that are permitted under any other exiting guidelines. What does this new directive from the RBI mean for the retail investor? Is the retail investor likely to benefit from the same?

Before we go on to the benefits, if any, let us first consider the rationale for the same. The first principle of investment is that 'do not put all your eggs in one basket'. By allowing Indian citizens to invest in global markets, there is a clear diversification. As Mr. Ajit Dayal, CIO, Hansberger Global Investor puts it, "I dare say that over the last thirty years period, in a US dollar adjusted basis, probably the rate of return that you earned from investing in the US would be the same as investing in India. So, although the BSE index has gone from 100 in 1980-81 to 5,600, it sounds like it has gone up 56 times. But the Indian rupee has gone from Rs 8 per US$ to Rs 45 per US$. So you have given up a lot of it because of the currency depreciation".Click here to read the interview. Coming back to the issue of benefits to the retail investor, we believe that this new measure will only be beneficial to a small section of the society, to start of with.

Currently, the US$ 25,000 per annum limit does not make investments in immovable property or any other large value transaction feasible (although one can invest in REITs (real estate investment trusts)). Therefore, initially, the large part of the US$ 25,000 limit could be channeled for mutual funds and stock markets investments abroad. Herein lies the problem. Indian investors have been very risk averse in the past and hence the existing exposure to the Indian equity markets is abysmal. Besides, the exposure to Indian mutual fund schemes also is very minimal. So, whether a large section of the Indian retail investor will be interested in global mutual funds and stocks remains to be seen. Obviously, there are risks attached to the same.

There are other technical constraints. Transfer of funds and access of information (read research) are some of them. Besides, the global mutual funds and e-brokers have to have their operations in India for us to invest in such instruments. More importantly, there is a lack of clarity about the tax structures in global markets and the impact of the same on returns from these investments. We may want to invest in countries like Japan. But whether Japan has a open policy also has to be understood. All this will take time.

Only when the international players come to India, will this new investment avenue make sense of the retail investor. By this, we mean that the onus is now on the mutual fund, brokerage and investment advisory sectors to bring out products that make it possible for Indian investors to invest in assets abroad without much hassle. We need to wait and watch as to how this new market segment evolves over a period of time. While this step by RBI per se is in the right direction, much more needs to be done (especially by the above mentioned sectors) in order to nurture the same.

Click here to read our articles comparing Indian companies with global majors BSE index has gone from 100 in 1980-81 to 5,600, it sounds like it has gone up 56 times. But the Indian rupee has gone from Rs 8 per US$ to Rs 45 per US$. So you have given up a lot of it because of the currency depreciation".Click here to read the interview. Coming back to the issue of benefits to the retail investor, we believe that this new measure will only be beneficial to a small section of the society, to start of with.

Currently, the US$ 25,000 per annum limit does not make investments in immovable property or any other large value transaction feasible (although one can invest in REITs (real estate investment trusts)). Therefore, initially, the large part of the US$ 25,000 limit could be channeled for mutual funds and stock markets investments abroad. Herein lies the problem. Indian investors have been very risk averse in the past and hence the existing exposure to the Indian equity markets is abysmal. Besides, the exposure to Indian mutual fund schemes also is very minimal. So, whether a large section of the Indian retail investor will be interested in global mutual funds and stocks remains to be seen. Obviously, there are risks attached to the same.

There are other technical constraints. Transfer of funds and access of information (read research) are some of them. Besides, the global mutual funds and e-brokers have to have their operations in India for us to invest in such instruments. More importantly, there is a lack of clarity about the tax structures in global markets and the impact of the same on returns from these investments. We may want to invest in countries like Japan. But whether Japan has a open policy also has to be understood. All this will take time.

Only when the international players come to India, will this new investment avenue make sense of the retail investor. By this, we mean that the onus is now on the mutual fund, brokerage and investment advisory sectors to bring out products that make it possible for Indian investors to invest in assets abroad without much hassle. We need to wait and watch as to how this new market segment evolves over a period of time. While this step by RBI per se is in the right direction, much more needs to be done (especially by the above mentioned sectors) in order to nurture the same.

Click here to read our articles comparing Indian companies with global majors


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