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What you can do with $25,000

Sunil Nayanar in Mumbai | February 23, 2004 09:15 IST

If you have around Rs 11-12 lakh (Rs 1.1-Rs 1.2 million) of loose change sloshing about in your bank account, you now have the option of letting the money jingle in dollars and cents.

Thanks to a Reserve Bank announcement in December, Indian citizens can remit upto $ 25,000 every year, no questions asked, for investments abroad. Always fancied owning a piece of Microsoft? Well, you can now do so. The question is: should you?

The short answer, as always, is both yes and no. It's yes, if you know your way around the global, and especially US, stock markets. It's still yes, if you want to invest through mutual funds.

It's no, if you think you are going to make tonnes of money just by buying dollar assets - whether it is shares, global funds, or real estate.

Three reasons why you may not make a killing. One, most analysts do not believe the US markets are going to outperform the rest of the world anytime soon.

Two, the rupee continues to strengthen against the dollar, and, if this trend continues, your dollar assets will depreciate in rupee terms even if the underlying investment doesn't do too badly.

And, three, the real cost of investing abroad is not the price you pay for a Microsoft share (or Wal-Mart, for that matter), but the opportunity cost of not investing in other markets (including India) that may outperform the US markets.

Wall Street's variety
From the Indian point of view, what's interesting on Wall Street today is not the possibility of a spectacular bull run, but the availability of a much larger spectrum of sunrise industries for investing.

In India, there may hardly be any biotech companies to invest in, but in the US you would have scores to bet on. From Biogen to Genzyme. Retail? Nothing beyond Pantaloons in India.

In the US, you could try any stock from real world Wal-Mart - the world's biggest company - to the cyber world's Amazon.com. Want to diversify across sectors? You could try mutual funds.

Want to look beyond the US markets? International stock funds can offer you options to invest in Latin American, Chinese or Russian stocks. Think the markets will crash this year?

How world indices fared


% gains
in 2003







Hang Seng


Dow Jones






Shanghai Composite


Not to worry. They even have a bear market fund, just in case things go wrong. Prefer the solidity of brick and mortar assets? You could invest in real estate funds, which as a category gave a 50.40 per cent return over the past year. You could also invest in commodities like gold.

A look in the rear-view mirror shows that 2003 wasn't a bad year for US stocks. The New York Stock Exchange Composite Index increased 30 per cent during 2003 after three consecutive years of declines.

But then, that looks practically insipid when compared with our own Sensex, which gave returns of 74 per cent. And if you think owning Microsoft is a big deal, consider this.

A Microsoft share, which currently quotes at around $27, appreciated by less than 12 per cent in the past 12 months while local boy Infosys gained nearly 28 per cent, and that too in what was considered a tough year for the Indian technology sector.

What $25,000 will buy you

US stocks

US $ price
on Feb 18


No. of 
shares you
 can buy

































Wal Mart
















There is a remedy though if you are not enamoured of Uncle Sam's offerings. The options in Asia look much more inviting.

For instance, China (81 per cent) and Thailand (134 per cent) were two markets that saw a bigger bull run than the Indian markets in 2003. So, if you are a big investor in Indian stocks, using the $25,000 window to invest abroad can work as a risk-diversification tool.

"From a diversification point of view it makes sense for an investor to put his money into a variety of investment classes like stocks, bonds, mutual funds and real estate abroad," says Nilesh Shah, chief investment officer (fixed income) of Franklin Templeton Investments.

"In a hypothetical sense you can think of commodities and stocks as viable investment options. However, real estate is a far-fetched idea considering that only $25,000 is allowed to remit overseas," notes Parag Parikh, chairman, Parag Parikh Financial Advisory Services.

Hastening slowly
Few people think that there's going to be a stampede to invest abroad. Says Parthasarathi Mukherjee, senior vice-president of treasury (international business) at UTI Bank: "I don't foresee any mad rush towards remittances in the short-term. It will take time for individuals to understand and use the facilities abroad before they take the plunge."

Ambareesh Baliga, vice-president of domestic brokerage firm Karvy Stock Broking, agrees. "Investors need to understand the implications of currency risks and taxes. So I don't expect any major rush to invest abroad as of now."

But assuming you want to do so, how do you go about it? "Resident Indians will have to open a foreign currency account before they start investing," notes Baliga.

Dollars for the asking

The forex liberalisation measure was first announced by finance minister Jaswant Singh in his series of pre-poll sops.

The fine print, released later by the RBI, says that resident individuals can now remit upto $25,000 per calendar year for any purpose without any distinction being made on whether the transaction is on the current account or capital account.

This facility is in addition to those already available for private travel, gift remittances, donations, studies, medical treatment, etc.

The facility allows resident individuals to acquire and hold immovable property or shares or any other asset outside India without prior approval of the Reserve Bank.

Individuals will also be able to open, maintain and hold foreign currency accounts with a bank outside India for making remittances under the scheme without prior approval of the RBI.

Even with the cap of $25,000 on free outward remittance, this is the first time resident Indians need not specify the underlying purpose of the foreign exchange transaction.

"The rule relaxation is an initial step into full capital account convertibility," says Nilesh Shah, chief investment officer (fixed income) of Franklin Templeton Investments. The upshot: you no longer have to be an NRI to switch between dollars and rupees.

But to figure out what and where to invest may need professional help, which is currently not easy to come by.

"Hardly any banks or broking houses are offering advisory services as of now, barring a couple of foreign and private sector banks. And they, too, are offering plain-vanilla investment opportunities such as fixed deposits, etc. I don't see too many Indians approaching foreign brokerages for investment advice as the cost of transactions would be high and an investment of $25000 would be too small to justify such expenses," says Baliga.

Citibank, ICICI Bank and Bank of Baroda are three banks which offer some fixed-deposit products in foreign currency - and that's not a bad place to begin given the attractive interest rates being offered as a starting initiative. Any resident individual holding an account with Citibank can invest in Citibank's foreign currency deposits.

Foreign currency deposits can be held in four currencies - the US dollar, pound sterling, the euro and the Australian dollar.

The scheme stipulates a minimum of $1,000 (or equivalent) with incremental deposits in units of $1,000 (or equivalent) up to a maximum of $25,000 (or equivalent) in one calendar year.

As a special promotional offer, Citibank is offering interest rates that are 1 per cent higher than Libor rates for deposits opened before March 1, 2004.

The bank offers 6.25 per cent on the Australian dollar, 4.75 per cent on pound sterling, 3 per cent on the euro and 2 per cent on the US dollar.

ICICI Bank's international deposits include schemes for the US dollar, pound sterling, euro and the Australian dollar, apart from Swiss francs. The minimum investible amount is the equivalent of $2,500.

And like Citibank, the bank is offering a special rate which is five basis points higher than Citibank's for three-month deposits, valid till February 29.

Despite the promise of more sophisticated schemes to come in the near future, the path ahead may not be strewn with roses.

"One needs to be extremely cautious about investing abroad. Global equity and bond markets are extremely volatile and, therefore, they signify a very high degree of risk for the uninitiated. It will be an uncharted territory," says Shah of Templeton.

Given such apprehensions, it is not surprising that few people are enamoured by the whole idea. "At present I can't think of anything which will be an advisable investment opportunity for an individual investor. I feel that this measure will benefit high net-worth individuals (HNIs) more," says Parikh.

Unreal estate
Ditto for investments in real estate. According to Pranay Vakil, chairman of international property consultants Knight Frank's India operations, $25,000 is a very small amount to start with when it comes to buying international real estate.

So forget about Monte Carlo, Ibiza and Ireland. "You'll need a minimum of $100,000 to make any meaningful purchase," says Vakil.

But don't lose hope yet. Vakil sees a way to beat the system. "Considering that the $25,000 limit is for one year, there are chances that you will see more remittances coming by the end of March. If two people can put in $25,000 each for one property (thus making it $50,000) and remit it before March 30, and remit the other $50,000 in April, you have $100,000 between the two of them."

Vakil also sees hope for the future. "My view is that the $25,000 cap will be relaxed in due course of time. This is just a trial period".

In that case, what kind of real estate deals should interest the Indian investor? "For an Indian, the cheapest destinations are in West Asia, especially in Dubai. There are properties in Jubeira beach which should be inviting to an Indian investor, being closer to India. In the UK also there are good bargains, though the London residential market is overheated. But one can consider places like Cornwall, Newkey, Plymouth, etc., which offer good value for money," says Vakil.

But he is not so optimistic about one's chances in the US. "As far as US is concerned, weather will be an important factor in choosing real estate. The western and southern parts of the US can be considered, especially places like Los Angeles, San Francisco and Atlanta. But even there you will have to shell out a minimum of $150,000-$200,000," Vakil adds.

Bumps alomg the way
All these goodies come with a catch. For starters, investors will have to take into account a whole lot of regulatory hurdles and tax implications in various countries before taking the plunge.

There are other restrictions, too. The new facility cannot be used for transaction prohibited or restricted under the Foreign Exchange Management Act.

Moreover, even if you can remit funds to the developed world, this facility cannot be used to send funds to countries identified by the Financial Action Task Force (FATF), a global money-laundering watchdog, as a non-cooperative country.

Points to ponder

Research comes at a price
It is all very well to start dreaming about investing in US shares and stocks. But considering that only limited professional help is available in India in these matters, whom do you approach for research on US stocks and investment tips?

Well, for starters, there any number of websites that offer you such services. Sites like www.fool.com, www. morningstar.com, www.forbes.com, www.cnnfn.com, www.cbsmarketwatch.com and www.investorguide.com are already well established names in this domain. Sites of New York stock exchange (www.nyse.com) and Nasdaq (www.nasdaq.com) also contain all the important details about US scrips, apart from news and real-time prices.

While these sites offer you the latest updates and stripped down versions of the latest research on companies, real research comes with a hefty price.

For instance, well known stockbroking firm Charles Schwab offers you advice and research on US markets and stocks. Schwab's private client service is available for an annual asset-based fee starting at 0.75 per cent applied to eligible assets in enrolled accounts.

Fees are billed quarterly with a minimum quarterly fee of $1,000. Included in the fee are 50 to 100 equity trades per year, depending on the size of your portfolio.

Brokerage charges in the US
Online trading may be the cheaper option when it comes to trading in US markets. North American brokers like Charles Schwab, T D Waterhouse and Halifax have over-complicated charging structures and it is worth remembering that trading directly through them may not be easy on your pocket.

Apart from quarterly or annual administration fees, these brokerages charge you some less-advertised charges, too. This is apart from the mandatory 0.5 per cent stamp duty on stock purchases.

If you choose to do online trading with them, commission for trades up to 5,000 shares will be around 0.3 per cent on an average, subject to a minimum of $25. For trades above 5000 shares, these sites charge you $ 0.015 per share.

The rupee appreciation effect
Investing in dollars may be a glamorous proposition, but when it comes to the real thing, remember that the rupee has been appreciating against the dollar over the past one year.

So if you have made a deposit in US dollars and the rupee appreciates in value, you will lose if you convert the money back to rupees at maturity. On the contrary, you stand to gain if the rupee depreciates, but analysts are not betting on that in the short-term.

The good news is that you will be better off investing in other currencies, considering that the rupee has depreciated against most other world currencies over the last year.

Analysts are advising that one should take a shorter-term view of the currency you are choosing to invest in, since in the long run it is difficult to predict currency movements.

The current list of non-cooperative countries includes Indonesia, the Philippines, Myanmar, Egypt and Ukraine. The RBI has also ruled out remittance to Bhutan, Nepal, Mauritius and Pakistan. There is more.

Real-time research on what to invest and where to invest abroad will be hard to come by for the retail guy (for a few sources on US stocks, see box).

Investing restrictions for foreign nationals also exist in several countries which will narrow down one's opportunities to a select few countries.

Again, given the volatile nature of markets the world over, it becomes a Hobson's choice to decide when to enter and exit global markets and other investing avenues.

Leave it on the pros
So, how does one cope with the issue of lack of knowledge? A simple answer is to leave it to the experts. "The better option for an individual investor will be to go through the mutual funds route. Mutual funds can manage the risk as well as provide better investment opportunities," advises Shah. A few funds are already getting ready to offer you products for investment abroad.

Parikh agrees that the route to riches is through institutions, though their advisory expertise may be in some doubt.

"As a fallout of the current liberalisation there will be a mushrooming of advisory firms who will try to advise investors about opportunities abroad. However, I don't think any of the local firms have the expertise to do so in an efficient manner. That is more in the domain of foreign investment banks and mutual funds," he adds.

Mukherjee is of the view that banks may not be able to attract customers at the same rate as mutual funds.

"I don't think there will be much demand for the current bank schemes in this area. However, individual banks are starting to come up with schemes to attract investors. The demand will be more for mutual funds and equities when suitable opportunities arise," he notes.

Principal Mutual Fund is the first Indian mutual fund to offer products in this category. The fund has launched a 'Global Opportunities Fund', labelling it as India's first-ever international equity fund.

According to the fund, its portfolio will be invested in international stocks. Yet, the investor can enjoy the conveniences of investing in a domestic mutual fund. While the investments and redemptions will be in Indian rupees, the fund will be benchmarked against the MSCI World Index.

According to Shah, the industry will take some time to cater to new demand. "Even though the RBI has relaxed foreign exchange controls, mutual funds are still some way away from managing foreign investments for individuals. There will be lot of regulatory guidelines to be met and my guess is that it will take three to six months for that aspect to be sorted out," says Shah.

There is also no guarantee of the type of returns an investor can expect if and when he decides to invest abroad. Given the diverse size and nature of markets overseas it is hazardous taking a guess on the returns front, say analysts.

"It is very difficult to predict what kinds of returns an investor can make abroad, because investment options and nature of markets the world over vary vastly," cautions Shah.

Whatever the case may be, analysts are unanimous that the exchange control liberalisation is a step in the right direction. Investment hurdles abroad and regulatory caveats mean you can't do it for a lark. But you are now free to take the punt.

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