We very recently discussed a way to diversify and de-risk my investment portfolio where I am slowly but gradually investing in US equities directly to add some much needed diversification to my long term investment portfolio for a while.
To be honest, why wouldn’t anyone want to invest directly in stocks like Netflix, Amazon etc. so it is no surprise that I have gotten a lot of my friends and family excited about this interesting addition to their investment portfolio?
To my surprise however, the new recent TCS (Tax Collected at Source) regulation on foreign remittance by the government saw me face a lot of concerned (at times angry) texts from the very folks I got started on their direct US equity journey.
Ankit, Does TCS now make our investments in US equities see a much lower return?
Ankit, Does it even make sense to invest in US equities now that TCS will eat away a sizable portion of any potential gains.
Well, instead of responding to them individually I decided to pen my thoughts here on why TCS on Foreign Remittance shouldn’t bog you down in your journey to continue investing in US equities
Before we jump into why TCS shouldn’t deter anyone from investing, let’s get to some facts and basics first
What is the new TCS on foreign remittance?
Indian residents can remit up to USD 250,000 under the LRS every year for various purposes such as medical treatment, gifts, maintenance of relatives abroad, foreign education and investment in real estate, stocks and bonds. A new provision, under the Liberalised Remittance Scheme (LRS), will come into effect from 1st October 2020, and it would levy a TCS (Tax Collected at Source) at a rate of 5%.
How Does the TCS on foreign remittance apply?
The TCS will apply on the amount remitted in excess of ₹7 lakh. So technically, if you remit 10 lakh, the 5% TCS only applies on 3 lakh
Why this TCS shouldn’t deter you from making investments in Equities abroad
TCS on foreign remittance is adjustable against overall tax liability
First and foremost, this new TCS can be adjusted against existing tax liability while filing income tax. Similar to tax deducted at source (TDS), the tax paid under TCS can be claimed back fully or partially as a refund while filing income tax return if the total income is below the tax threshold limit for the year. It can also be adjusted against an individual’s overall income tax liability.
So, in essence while the initial cost of investing in foreign equities might become expensive the reality is that this is largely notional in the sense that it can be adjusted against your existing tax liability.
As a professional, your employer already deducts TDS on your salary. If they didn’t, you would have a higher tax liability at the time of filing. So in the same spirit, TCS on foreign remittance would very similar where it is just a mindset shift.
The Indian & US Markets don’t demonstrate a strong correlation
Investment for me is always about capital appreciation for the long term with the secondary focus being de-risking the portfolio to a singular market/event/asset class.
So while you could diversify across equities, MF, bullion, real estate etc. within India it is also important to find investing opportunities where the correlation between different assets is not very high – essentially one asset class/market seeing a decline shouldn’t necessarily impact the other
This 10 year chart comparison between the Sensex and Dow Jones Industrial Average is a strong indicator of very low correlation between the Indian and US Equities markets making this a very strong indicator for having US equity exposure in everyone’s portfolio both as a de-risking strategy but also for capital appreciation irrespective of the TCS because at the end of it, as long as you are in it for the long term the 5% TCS doesn’t really impact your long term capital appreciation
Getting Smart With Your Foreign Investment Strategy – A systematic way to investing in equities abroad
Having said that, now that TCS makes the upfront costs to invest in foreign equities slightly more expensive it is imperative to have a slightly more sophisticated and a systematic strategy to invest in foreign equities without having to think too much about how TCS impacts but thinking about how and why you want to access the US equities markets
So, for example – If you are a high risk investor in the Indian equities market, you might want to either maintain that same risk approach for US equities or you may not be de-risk by taking a ‘low’ risk investing strategy when it comes to foreign equity
However, while it is relatively easier to research and study the Indian markets doing so for foreign markets can often be tricky making it difficult to make specific investment choices.
One way to diversify your investment portfolio with broader US markets is through ETF investing. However, if you want to take a more active approach but then not have to worry about researching and evaluating individual stocks that could be daunting.
Rather why not go for an investing platform like Stockal that simplifies investments for you by monitoring your portfolio better, keeping track of its health, making knowledgeable investing decisions, discovering interesting stocks & investing themes every day so that you don’t have to scour through reams of data or depend on unreliable guesswork.Stockal provides assistance to retail investors in India, Middle East and South East Asia to ‘globalize’ their savings and wealth by investing money in mature international markets such as the U.S.
Stacks by Stockal is a fairly innovative solution to solve this wherein Stacks are nothing but a collection of securities that you buy into based on various attributes. For example, the various ways Stacks exist on Stockal are,
- Thematic Stacks to keep an investor updated about the newest International development themes
- Expert Stacks is for investors who would want assistance in investing in portfolios established by industry professionals
- Industry Stacks allows the investor to get a taste of a number of industries
- Risk-adjusted Stacks will benefit the investor in choosing the portfolio based on their willingness to take risks
As we discussed earlier, if you are looking at investing in US markets as a way to purely de-risk your portfolio you could opt for risk-adjusted stacks and ensure that irrespective of individual securities you are buying into an entire stack that works to bring you exposure to different securities that work based on your risk.
As for me, I prefer both Risk-Adjusted Stacks as well as Industry Stacks (Technology, Pharma) to balance both risk but also a bullish belief in technology & pharma stocks
With Stacks, it is super convenient to buy with just one click and more importantly auto-balancing of the portfolio. So for instance, if there are stocks in your risk-adjusted stack that are now unlikely to track to your ideal risk, the expert team behind would periodically adjust the composition of that stack (buying and selling) to ensure your stack’s objectives are met based on changing market conditions