Q. I am Rohit, a software engineer in my early 30s. I have recently inherited some funds from my family. I want to take advantage of the LRS to invest in foreign markets and diversify my investment portfolio. However, I am overwhelmed by the numerous investment options available, fluctuating exchange rates, and the complexity of taxation rules. Please help me make the right decision.
Happy to note that you are keen on diversifying your portfolio globally, Rohit.
Before we get into the factors that you must consider, you must note a few things about the Liberalised Remittance Scheme (LRS).
As per the guidelines issued by the Reserve Bank of India (RBI), you are allowed to invest only $250,000 per fiscal year via the LRS route. Also, the tax collected at source (TCS) rates were recently raised from 5% to 20% for funds remitted through LRS for overseas tour packages and foreign remittances (excluding payments for education and medical purposes).
The effective date for the applicability of the new tax rate is October 1, 2023. It would be best to complete any planned foreign investments on or before September 30, 2023, if you want to take advantage of the lower TCS rate.
Now let us look at some factors you must keep in mind before investing abroad.
Financial goals and risk tolerance
You must know your financial goals and your risk appetite before you invest. Foreign investments can be riskier due to currency fluctuations and geopolitical factors. Therefore, every decision you make must be well informed.
Fluctuating exchange rates can affect your returns. Gains or losses from changes in currency exchange rates can have a significant impact on your overall returns. Ideally, investments should be in a single currency (like US dollars) to avoid the harsh effects of multiple currency swings.
Tax laws can be complex and can affect your returns. Some countries have double taxation treaties that may have a bearing on how your investment income is taxed. Consult a tax professional who is well-versed in cross-border taxation to ensure compliance and minimise any negative impact on your returns.
Legal and regulatory considerations
Different countries have different rules and regulations regarding foreign investors. You must be aware of and comply with all restrictions, tax laws, and reporting requirements in the countries where you intend to invest.
Diverse investment vehicles
Explore the different investment vehicles available, such as stocks, bonds, mutual funds, exchange-traded funds (ETFs), and real estate. Choose those that align with your goals and risk tolerance. It is important to diversify in different regions to avoid the risk of being caught in one nation’s downward economic cycle.
On the whole, we feel ETFs are a good place to start. These have lower minimum investment requirements than other actively managed structured products. You can consider other investment opportunities once you have built up a good base in ETFs. This would also give you time to understand the global market scenario and gain ample experience. However, I will recommend getting in touch with a financial advisor before taking your decision.