While you can buy equities directly on foreign markets, buying units of Fund of Funds or Exchange Traded Funds through a mutual fund is far easier.
An investor can gain exposure to overseas equities in two ways: through mutual funds or by purchasing stocks directly on foreign markets. There are a variety of mutual fund forms that provide this exposure. There are funds of funds (FoFs) that invest your money in other countries, such as the United States, Europe, China, or any other area of the world.
These funds, whether they are FoFs or ETFs, are known as feeder funds since they gather money in India and invest it in a fund outside. A FoF or ETF may also buy stocks on foreign exchanges, rather than feeding into another fund.
Mutual funds are the more convenient of the two options. Everything is packaged for you, including research, stock selection, tracking, execution, and so on. There is a cost associated with it, known as the total expense ratio (TER). The returns you get, as indicated in the fund’s NAV, are net of TER.
You must do it yourself if you are buying international equities by remitting monies abroad through LRS. You must identify stocks, find a stock broker to execute the trades, and keep track of the stocks. There may be pre-made model portfolios accessible from the service provider that you may copy with a click of a button, but there will be a fee. There is a $250,000 cap per fiscal year, although this is not a problem for most people.
In terms of taxation, even if the underlying investments are equity, FoFs are taxed as debt funds. Buying equity stocks for a straight fund (not a FoF)—international funds are taxable as debt funds. A straight fund with a substantial component in Indian equity equities and a minor component in foreign stocks is taxed as an equity fund if the Indian equity component exceeds 65 percent.
When you acquire equities directly from companies outside of India, they are considered as unlisted for tax purposes because they are not listed on an Indian exchange, such as the NSE or BSE. If you retain the stock for two years, it becomes long-term, and you must pay tax at a rate of 20% plus any relevant surcharges and cess. It will be classified as short-term capital gains if you retain it for less than two years, and will be taxed at your marginal slab rate.
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