Foreign Stocks Tips for Beginners: The basics of investing in foreign stocks for beginners (2024)

In the two decades since Indian investors were first permitted to invest abroad, several different routes for doing the same have come up. You can invest by buying stocks directly through a broker, or you can buy into an exchange-traded fund, also through a broker, or you can invest in a mutual fund. The mutual fund will be a normal Indian mutual fund run by the same Indian mutual fund companies and available through the same channels. The brokers can be traditional ones (although that’s rarer and rarer now) or it can be a web app or a mobile app. The broker may purport to provide research or it could be a barebones transaction service.

Conceptually, this is pretty much identical to the options that you have when you want to invest in Indian equities. There is no difference as far as the mechanics are concerned. Of course, the legalities are different, the tax treatment is different and far more than for domestic stocks, that does make a difference to the route you take.

What remains is to decide where to invest, and that’s the real story. In this age of the internet, it definitely feels that research on any stock—foreign or Indian—is not difficult at all and the foreign ones are no more difficult than the Indian ones. You could open any finance website and if you type AMZ you’ll get a ton of information about Amazon and if you type INFY you will get an equal ton of information about Infosys. No difference at all.

I don’t disagree with this. However, what I do disagree with is that ease of gathering information is the same as actually making good investment decisions, whether for Indian stocks or foreign ones. Just like for domestic equity, the real differentiator is the amount of work you have to put in in order to make your investment decisions.

This brings to mind a conversation that Warren Buffett had with a shareholder at his company’s AGM a few years back. In response to a question about investing in stocks versus funds, Buffett said there are professional investors, and then there are amateurs who invest. Being the former requires a lot of work and research, which many, many amateurs don’t have the time or inclination to do. He said that the main problem for most people lay in “trying to behave like a professional when you aren’t spending the time in the game needed to be a professional.”

I’m not suggesting even for a moment that an individual can’t be successful in investing directly in stocks. Many investors invest themselves with superior results, and for Indian stocks, Value Research itself has a premium Stock Advisor service that helps people do that. However, for a beginner, the odds are not favourable. An even bigger problem is that even those few would have probably started tasting success after many failures, and each of these failures would have landed them with some losses. For most of us, whose goal is to simply get higher returns for our savings, this business of learning through losses turns out to be a deal breaker.

Equity funds solve all these problems simply. There are many advantages to investing in equity through mutual funds and they are all equally applicable to Indian ones as well as foreign ones. A major one is a disciplined diversification. Fund managers operate within an institutional framework that enforces certain ground rules of investing. For instance, there could be a set of rules defining the investments such as there must be at least 15 or 20 stocks with no less than X per cent of the total portfolio. Such rules define a framework that ensures that the portfolio stays diversified and safe from shocks that may strike individual stocks, sectors or types of stocks. Individuals who manage their own stock investing would rarely have the knowledge or the discipline to do all this.

Foreign equity investing brings an important diversification to your portfolio. However, the mechanics and the logic of taking decisions remains the same. For beginners, the ideal route is also pretty much the same as domestic.

(The author is CEO, Value Research)

...moreless

...moreless