• Investment World
• eWorld
• Catalyst
• Mentor
• Life
• Canvas
• Praxis
• Urban Pulse
• Brand Quest

Suresh Krishnamurthy

The liberalisation of rules on overseas investments opens up a number of opportunities for Indians. Investing overseas is however complicated. Introduction of suitable products by banks and mutual funds can only deliver value to Indian investors.

A YEAR ago, Indians were allowed to invest in non-Indian stocks and bonds through mutual funds. Now, direct investment of up to $25,000 (about Rs 11.5 lakh) per calendar year has been allowed. This has opened up a number of opportunities for Indian investors.

It is, however, not easy to get better returns from overseas investments than domestic securities. Mere holding of short-term foreign currency deposits will not prove useful. Only the introduction of suitable products by intermediaries such as banks and mutual funds will help Indian investors benefit from investing overseas. Such investments would help Indians diversify their risk.

Rising rupee — declining returns: Returns from overseas investments will have two components — asset price appreciation and change in currency value. The change in currency value could be negative for Indian investors.

This is because the rupee is expected to strengthen steadily over the years.

If the rupee does strengthen, then for a given amount of foreign currency, we will get a smaller amount of rupees later than we get now. This will reduce the returns from an overseas investment.

Unattractive debt: Expected strengthening of the rupee makes long-term investment in overseas debt securities unattractive. Overseas debt securities are already offering lower returns than what is available in India.

For instance, a 10-year US government security now offers a yield of about 4.2 per cent. A 10-year Indian government security offers about 5.2 per cent. So, if currency returns are negative, the total return from the investment will be even lower than 4.2 per cent.

Importantly, the debt securities of other growing economies, such as those of China, Thailand, Indonesia or Malaysia, are also not as attractive as those in India. For instance, in China, yields are half what is available in India.

In addition, globally, interest rates appear to have bottomed out.

The Bank of England increased interest rates in the past week. Over the next 12 months, the central banks of several other developed countries may follow suit. A hike in interest rates will lead to a temporary loss of value. In this context, overseas investments in top-rated debt securities do not appear attractive.

Equities are attractive: Equities, however, are more attractive. Markets in the US, the UK and Germany remain vulnerable as the economic growth in these regions over the long-term is expected to be far less than what has been achieved in the past. There are, however, individual stocks that may be attractive.

In addition, the markets of emerging countries such as those in the Asian region or in South America appear far more attractive. Economic growth in these regions is expected to be much better than that in the developed world. For instance, Brazil, Russia and China, along with India, have been identified as future economic superpowers. Scope for higher returns from equities of companies in these markets are higher. The risks of investing in these markets are, however, likely to be higher.

Individuals on their own may find it difficult to identify securities with potential. They will need the help of skilled intermediaries such as mutual funds.

Easing regulations: For mutual funds to offer such suitable products, the existing rules have to be liberalised.

For instance, equity mutual funds are allowed to invest only in stocks of companies that hold at least 10 per cent in a listed Indian company.

Only the removal of such restrictions on mutual funds can facilitate meaningful overseas investments.

The regulatory environment also needs to be relaxed to facilitate the introduction of innovative mutual funds.

For instance, a commodity mutual fund, which would buy into commodity indices or futures or options, will be helpful.

This will be hedging against inflation, which is still a tough ask in India. The availability of such innovative funds would offer investors choice to structure their portfolios in line with risk-return preferences.

Article E-Mail :: Comment :: Syndication

Stories in this Section
Quiz

Copyright © 2004, The Hindu Business Line. Republication or redissemination of the contents of this screen are expressly prohibited without the written consent of The Hindu Business Line