Building an overseas portfolio? Stick to traditional instruments

As the rupee depreciates against major currencies and the domestic market remains volatile, many high-networth individuals (HNIs) are looking at diversifying their investment overseas. Some international markets have done better than India, and if you add the currency appreciation to the returns, the overall gains are much better than what an investor would have made in the domestic market.

Sample this: International mutual funds that focus on the US, for example, have returns between 18 per cent and 28 per cent in last one year. The dollar has gained 4.1 per cent. The one-year average return from domestic large-cap funds is 9.8 per cent, and from multi-cap it’s 8.8 per cent.

Many investors also want to invest overseas as they want to send their children for studies abroad. They want to start building a corpus that takes care of kids’ education and also let them buy a second house that their children can use.

Investing overseas comes with its own set of challenges and complexities. The wealthy also need to see whether they should opt for a trust structure or invest via their overseas bank accounts. If an individual has assets abroad, he also needs to ensure that estate planning is in place for multiple geographies in case something happens to him.

Global investment through one location

Under the Liberalised Remittance Scheme (LRS), an individual can remit $250,000 abroad. A family of four can, therefore, remit up to $1 million. Typically, HNIs open bank accounts overseas with global banks that have presence in India. All international investments are made through such bank accounts. The choice of the region depends on the objective of the individual. If he wants to send his child to the US for study or buy a property in the UK, he will open the bank account in the US and UK, respectively.

But if the remittance is primarily for investing in liquid financial assets, most prefer Singapore. “The country is closer to India, and it’s easier to travel there. Being a stable country, it gives additional comfort to HNIs. Also, Singapore-based wealth management companies are more focused on the Asian region,” says Himanshu Kohli, co-founder of Client Associates, a multi-family office firm. Singapore bankers also frequent India and that helps build trust with clients.

Make in-depth plan

If you are investing abroad for the long term to create a corpus for children’s education and to buy a second home or to shift base to another country, you need to prepare an in-depth financial plan estimating a corpus you will need in the future, bifurcate each of your goals of investing abroad, calculate inflation, and so on. Most investment advisors suggest sticking to regular investment avenues such as managed schemes (mutual fund, private equity and venture capital) and bonds. Investors should avoid exotic investments such as wine, art or classic cars, at least in the beginning.

Assume you want to pay for kids’ education abroad, buy a property and retire there at 65. You want Rs 500 million for these three goals. You need to calculate the corpus you will need for India and abroad. Suppose you need Rs 250 million for the three overseas goals and Rs 250 million for India, you will accordingly invest 50:50 in India and the foreign country. “While there are ways and structures other than LRS to remit money to another country, LRS is better. An individual slowly remits money abroad and invests gradually to build a portfolio in a systematic manner. It helps ease the cash flows and also saves from currency and market risk,” says Kohli.

For minor diversification, international funds is good enough: If a wealthy person is investing only for diversification, he can achieve it through international mutual funds available in India. While international funds have been around in India for a long time, not many advisors cover them extensively. With growing demand from HNIs to diversify their investment internationally, some wealth management firms like Sanctum are planning to launch a strategy around these schemes. Based on their views of the region or the sector that would do well, the wealth management firm will give a higher allocation to the country or the sector and lower to others. The portfolio will be rebalanced and reviewed periodically for such changes.

Along with getting geographical exposure, an investor also gets currency exposure in these funds. None of the mutual fund houses hedges the currency in these schemes. “It also helps save on the LRS limit, which is a big positive. But choices and options are limited in these funds. They may not have a country that an investor wants to take an exposure to. There is also no option for debt investment as these are pure equity funds,” says Nishant Agarwal, managing partner and head of family office, ASK Wealth Advisors.

Miss-selling is rampant

Typically, most wealthy families can remit up to $1 million through LRS. But for wealth management firms or private banking, this is a small amount. Banks abroad look at a relationship of at least $2 million to $3 million. With a $1 million corpus, banks usually look at such clients as mass affluent. Wealth managers say that many times such investors are sold insurance policies which as similar to unit-linked insurance plan or traditional plan in India. The costs and commissions in these products are high. Choosing your advisor through references and after a thorough evaluation is one way to avoid falling prey to miss-selling. Avoiding products that you don’t understand is another way.