Here are the pros and cons of using old and new routes

There are multiple ways to invest abroad, and with deepening of markets, more avenues are becoming available.

Here is a look at the advantages and disadvantages of both old and new avenues, and different investor profiles.

Direct purchase of stocks

There are broking firms, either multinational firms or Indian entities with tie-ups with broking firms abroad, who facilitate the execution. Your investment in stocks or bonds abroad is subject to liberalized remittance scheme (LRS) limit of $250,000 per financial year. At a conversion rate of 86 per dollar, it is ₹2.15 crore per financial year.

Provided you do not have any other requirement for money abroad, children’s education, or travel, you can utilise this limit. However, one issue here is stock selection. If you are in a different profession, then analysing stocks, that too foreign stocks, is not your forte.

There are entities in India that offer a curated basket of stocks which you can purchase, and they will facilitate the transaction through a broking entity with which they have a tie-up. However, they do not have accountability for the performance of those stocks. You require guidance on picking stocks abroad. Otherwise, it is not advisable to venture into it.

Managed vehicles – mutual funds

Through the mutual fund route, you not only get the advantage of a professional fund management team managing the portfolio, but also the fact that it is not part of the LRS limit. The issue of the MF route is entirely different.

There are RBI limits for the MF industry, of $7 billion for investment abroad and another $1 billion for investments in ETFs abroad. The limits became almost full, and MFs had to stop accepting fresh subscriptions. However, certain MFs investing abroad do accept money from time to time.

There are redemptions, which open up scope for accepting fresh money. Hence, you can go through the MF route. You get the advantage of a fund manager managing your money, or a passive fund following an index abroad, where you can avoid the fund manager risk (risk of the fund manager underperforming a benchmark index).

GIFT City options

There is another avenue in MFs: recently, a fund has been launched under the IFSCA (International Financial Services Centres Authority) jurisdiction at GIFT City. This is a different jurisdiction, not subject to the usual RBI or SEBI regulations. That is, it is not subject to the cap on investments abroad or $7 billion or $1 billion. This is a retail fund, with minimum subscription of $5,000 ( ₹430,000) at a conversion rate of 86.

The term retail fund has a particular connotation: it is a particular fund structure under the IFSCA. This fund is subject to the LRS limit of $250,000 per year. The appeal of this structure is that at $5,000, the ticket size is relatively affordable. There are other outbound products available at GIFT City (other than mutual funds) where the ticket size is higher.

Portfolio management services

There are PMSs available at GIFT City, where you convert your money from your normal rupee bank account to dollar and remit to a bank housed at GIFT. The ticket size is usually $75,000, which is ₹64.5 lakh. Quantum could be lower if the service provider offers “accredited investors”. There is a professional fund manager to manage your portfolio. Money remitted to GIFT jurisdiction is part of the LRS limit of $250,000.

Alternative Investment Funds

There are fund management houses that have Alternative Investment Funds (AIFs) under IFSCA guidelines. The fund would be structured as something like “A Restricted Scheme (Non-Retail) classified as a close-ended category III AIF under the IFSCA FM Regulations”.

A restricted scheme is one under a private placement offer to only accredited investors or investors investing above $150,000, and it shall have not more than 1,000 investors.

Things to know about GIFT City route

• 20% tax collection at source (TCS) for payments made under LRS is deducted at the time of transfer by the Investor, above ₹10 lakh.
• Long term capital gains (LTCG) tax is applicable after a holding period of two years, which is 12.5% plus surcharge and cess. For less than two years of holding, it is the marginal slab rate.
• For accredited investors, there are certain eligibility conditions prescribed by the authorities, for example net worth or income per year. For accredited iinvestors, the product manufacturer may prescribe a lower ticket size.
• Money remitted from your normal bank account in rupee to GIFT City bank account in dollar is already part of LRS limit. When the money is actually invested abroad, there is no separate implication.

Similarly, when there is a redemption from investments abroad but the money stays within GIFT, there is no LRS implication. It can be remitted abroad later when required.

Joydeep Sen is a corporate trainer (financial markets) and author. Views are personal.