Foreign Investment

Risk and Benefits of Overseas Investment

Overseas Investment

Since economies are moving towards digitalisation and making it feasible to conduct transactions anywhere in the world, global market investment has become increasingly popular among investors in recent years. Increasing technology has made it easier than ever to invest in the stocks of a company with operations in another country. One can buy and handle overseas equities without leaving the country. we discuss Risk and Benefits of Overseas Investment

Despite its difficulties, such as onerous rules and bureaucracy, India is seen as a stable and enticing market for foreign investment. The Government of India[1] has made progress recently to simplify the regulations and streamline processes for foreign investors making investments in India. Because of advancements in digital technology and internet usage, foreign businesses increasingly find it easy to establish and start operations in India. Let’s look more closely at overseas investment and see how it can help and endanger investors.

Overseas Investment

Overseas investments are those made into a home economy by individuals or companies from other nations. These investments, which can be made in a number of ways, have the potential to be very advantageous for both the investor and the recipient country.

Due to the fact that it provides nations with access to resources like finance, technology, and information, it is crucial to the operation of the global economy. Countries can create rules and regulations that encourage investment and drive economic development by thoroughly comprehending the various forms of foreign investment.

Overseas Direct Investment (FDI)

  • Foreign direct investments, or FDIs, are made directly by foreign entities in other countries’ enterprises or organisations.
  • This form of investment is long-term and typically requires substantial capital investments.
  • It can take many different forms, including the development of a new business, the acquisition of real estate, or the acquisition of a foreign corporation.
  • The foreign entity has substantial ownership and control over the investment.

Foreign Portfolio Investment (FPI)

  • Investing in stocks, bonds, and other assets on the financial markets of a foreign nation is known as foreign portfolio investment (FPI).
  • FPI does not involve direct ownership or control over the investment, in contrast to FDI.
  • Instead, FPI investors purchase and sell shares on the open market, anticipating making money off price fluctuations.
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Importance of Overseas Investment in India

Over the past few decades, overseas investment has been essential to India’s economic growth. Here are several justifications for why India needs foreign investment:

Economic Development – Foreign investment can support economic development by providing the necessary funds and resources to finance new projects, extend current ones, and modernise infrastructure. It can result from increased productivity, new employment development, and general economic growth.

Infrastructure Development – Contribute to the growth of infrastructure, such as power plants, ports, and airports. By enhancing connectivity and logistics, domestic businesses may find it easier to conduct business and draw in more international capital.

Employment Creation – In India, foreign investment has the potential to generate job opportunities, especially in the labour-intensive sector. This can lower unemployment and poverty while raising workers’ living standards.

Transfer of Technology – Bring innovative technology and knowledge to India so that it can boost its competitiveness and production. That can be very helpful for developing nations like India that might not have the means or knowledge to develop new technology or products.

International Market Access – Indian businesses may gain access to foreign markets through foreign investment, which may enable them to grow their client base and helps in improving exports. Small and medium-sized businesses, in particular, may benefit from this because they might not have the knowledge or resources to join international markets on their own.

Advantages of Overseas Investment

While investing in foreign stocks may seem challenging, it can help you create a powerful, stable portfolio. Some of the advantages of overseas investments are:

  • Diversification of Investments – One of the main advantages of overseas investing is diversification. Investors’ attention is quickly shifting from domestic to foreign markets. You greatly lower your risk by keeping your money across a variety of investment vehicles across different geographies. 
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Even if one country has an economic slowdown, it will only have a limited influence on your portfolio because the correlation between regions is typically modest. By protecting it from market volatility, diversification also gives your portfolio stability.

  • A Variety of Investment Choices – When you invest in the global market, your investment alternatives are not just geographically constrained. High profits are possible when investing in financial products that are not offered in India. You can also invest in foreign equities from other industries. You can invest in global industry giants by using overseas investing.
  • Currency AppreciationOverseas investment provides benefits to you in the form of currency fluctuations in addition to investment returns. You receive additional returns when the foreign currency’s value rises relative to your home currency’s value.

Assume you paid Rs.10 lakhs for a US stock at a time when the rupee was selling at Rs. 71 per dollar. When the stock’s worth reached Rs. 12 lakhs, you then made the decision to sell it. At the same time, the dollar’s worth increased while the rupee’s value decreased to Rs. 75/$. As a result, in addition to the Rs. 2 lakhs profit on your investment, you also benefit from the dollar’s rise.

  • Low transaction costs – Numerous fund houses and asset management companies are introducing mutual fund schemes designed expressly to participate in overseas markets as more and more clients turn to global investment possibilities. Removing expenditures like transfer fees, currency conversion fees, annual maintenance fees, etc., lowers your overall transaction costs. 

That offers hassle-free possibilities for overseas investment and lowers the cost. These fees, however, differ from those of every asset management company. So, before you begin investing, be careful to check with the asset management company or your broker.

  • Fraud-prevention measures – International investing also protects you from fraudulent activity and liquidations, which is a significant advantage. How? Well, in order to stop market misuse and safeguard investors’ interests, the majority of industrialised economies have strict laws. It guarantees that your investment is safe and you won’t be scammed.
READ  Overseas Investment in Emerging Markets

Overseas Investing Risks 

International investment has clear advantages. However, one must also take into account the risks involved. While investing internationally, there are three main risks that you should be aware of. 

  • Increased Transaction Fees – The increased transaction cost, which varies depending on the foreign market you intend to participate in, is the biggest obstacle to investing in overseas markets. You should be aware that in addition to the brokerage commissions, there can be other expenses, including conversion fees, transfer fees, and annual maintenance fees.
  • The volatility of currencies – When making direct investments abroad, you must first exchange your Indian rupees for another currency at the going rate. Suppose you hold a foreign stock for a year before selling it. The foreign currency is subsequently exchanged back into Indian rupees. Depending on which way the domestic currency is trending, that could assist or hinder your return. 
  • Political Risk – You should take the country’s geopolitical climate into account when investing. Political developments have an impact on the nation’s internal markets and may cause volatility. Even the most well-known corporations could suffer from government and policy decisions in developing markets. 

Conclusion

To attain significant portfolio diversification, international investing has become imperative. While the advantages are considerable, you must also consider the hazards. Online resources are available with data that may be used to assess hazards and determine the ideal asset allocation for your portfolio. Before making any investment decisions, you can also speak with your financial advisor. 

Read our Article: Factors to consider in case of overseas investment

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