Using Your LRS Limits for Effective Global Portfolio Diversification

As the world becomes more integrated and interconnected, where and how you invest your money and build assets for future generations has changed. Traditionally Indian families have had a significant home bias in their portfolio investments. This preference is fast evolving, with families now making room for global ideas and seeking global diversification in their portfolios.

Currency Controls & the Liberalised Remittance Scheme

The Liberalised Remittance Scheme (LRS), unveiled in 2004, finally allowed resident Indians to freely remit capital overseas for certain permitted current or capital account transactions, subject to an annual limit. Today the LRS limit per individual per Indian fiscal year is US$250,000, which can be used for travel, education, and other expenses overseas as well as for investments in foreign stock, properties, bonds, and deposits. (A separate $1 million annual outward remittance is permitted to Non Resident Indians via NRO accounts at regular banks, subject to certain regulatory guidelines.)

A majority of the affluent resident population has adopted an increasingly global lifestyle. Travel, maintenance of close relatives, and studies abroad constitute a sizable chunk of outward remittances. In 2020–2021 alone, resident Indians spent more than $9.7 billion on such expenses, accounting for over 75% of the LRS outgo that year.

Many Families Don’t Use Their LRS Limits Each Year

The story these numbers fail to tell is that most families still do not utilize their annual LRS limits effectively. Very few families remit the full $250,000, and even fewer use the LRS to proactively set aside a kitty for their dollar needs, somewhat like an annual “dollar SIP” (that is, a systematic investment plan in US dollars).

As a result, dollar deposits and investments in overseas property, equity, or debt remain less than 10% of the total annual LRS outgo today. We believe this number would go up if more families recognized that they have an opportunity to build a dollar-denominated nest outside India for their future global requirements.

But Why Do I Need a $ Portfolio When India Is Doing So Well?

The idea is by no means to move a major chunk of your assets overseas if you still reside in India. However, one must realise that a domestic-only portfolio may no longer fulfil the aspirations of global families. 

First, there is the issue of the historical depreciation of the Indian rupee versus the US dollar. Since the great recession in 2008, the Indian rupee has lost more than 75% of its value against the US dollar, with an annual depreciation rate of about 3% to 4%.

Second, there is the opportunity cost of ignoring global markets. The US stock market alone represents around 56% of the world’s equity markets. Not participating in a major market inadvertently leads investors to miss out on high-quality ideas that are just not available in India. And we are only talking about the listed equities market here. A whole range of asset classes and instruments are unavailable to Indian investors unless they have foreign accounts.

Additionally, although one cannot wish away the systemic risk during events like pandemics or geopolitical events like wars, having exposure to different geographies can definitely provide diversification benefits and, if planned well, reduce the volatility of your portfolio. 

In terms of market capitalization, the S&P 500 (which is the topmost indicator of large-cap stocks in the US market) requires each company to have an unadjusted market cap of at least $13.1 billion in order to be listed. If you compare the companies listed at the top of the S&P 500 to those in the Nifty 50, Apple has a market capitalization that is almost ten times that of Reliance Industries. Hence, comparing an investment in the Nifty 50 to one in the S&P 500 index is like comparing the proverbial apples and oranges.

While nobody can time markets perfectly, investors who have not started preparing to invest some capital overseas by opening foreign/offshore accounts and using LRS every year may miss out on interesting opportunities when they present themselves. 

How Can I Start Building a Global Portfolio?

Today, there are a few avenues available to domestic investors for investing in global markets, but there are also a growing number of challenges related to them.

Over the last few years, international mutual funds, which in turn invest in foreign securities, funds or indices, have become a popular choice for resident Indian investors looking to start investing abroad. Since the investment is made in domestic feeder funds in rupees, these investments do not make use of the LRS route and are easy to do. However, the Securities and Exchange Board of India (SEBI) recently advised Indian mutual funds to stop further investments in foreign securities to avoid breaching the industry’s foreign investment limit of $7 billion. As a result, about 65 international mutual funds available to resident Indian investors have suspended additional inflows, waiting with their fingers crossed for the Reserve Bank of India to increase the limit sometime in the near future.

There is also the option of opening an overseas trading account, either through a domestic broker or a foreign one. In general, brokering platforms make commissions on the number of trades made, and their business models and compensation mechanisms may or may not align with your family’s interests.

A good number of digital platforms today allow Indian investors to invest in overseas markets using the LRS route. By partnering with foreign brokers, asset managers and Indian banks, these platforms aim to provide investors with seamless access to global investments, largely offering a do-it-yourself model. There is little investment curation or expert advice available.

An emerging popular choice for more sophisticated global families is to appoint a seasoned overseas wealth advisor, who can guide them as they go about creating an offshore basket using LRS. As an advisor charges you a fee that is based on your portfolio’s success, you can be more confident that your money will be allocated prudently, in line with your specific circumstances and goals. Working with advisors has the added benefit of tapping into their network of experts on matters related to cross-border taxation, estate and succession planning, etc in the foreign market.

What Should I Look for When Selecting an Advisor?

While finding an overseas advisor may seem simple enough, it is not easy to find one whom you can trust to do the right thing. In LCR’s view, investors should keep in mind the following “five Cs” of choosing an overseas advisor to help them invest in foreign markets. They are:

  1. Client orientation: Pick advisors who will care, regardless of the ticket size being invested. Timely reporting and communication are also critical. Local, round-the-clock support makes everything more seamless.
  2. Competence: Look for subject market expertise and established credentials. Working with advisors who have strong sourcing and manager selection abilities in the foreign market is also of great importance. Differentiated ideas can often deliver great outcomes.
  3. Cross-border expertise: Look for service providers who have experience working with international families and managing their cross-border transactions.
  4. Costs: Check how the advisors are compensated and whether they are 100% aligned with your interests. Understand the other expenses and taxes involved.
  5. Compliance: Work with entities regulated in the foreign market. Check if any specific solutions are required from the perspective of local regulatory compliance.

With the Liberalised Remittance Scheme’s annual deadline of March 31 fast approaching for the current financial year 2021–2022, the market is certain to see a flurry of investments. For those who haven’t yet done so, it is crucial that they do not miss out on the opportunity to diversify their portfolio globally, albeit with proper guidance and caution.