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International Investing Via NSE IFSC : All You Need To Know

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NSE IFSC

By: Tavaga Research

Stock Market, is now a household term. In FY2021 alone, 14.2 million accounts were opened as a result of the pandemic, which is three times greater than the previous fiscal year. It is apparent that investors were searching for additional investment opportunities in order to diversify their income. The National Stock Exchange, or NSE, has now come up with a more sophisticated concept that has never been seen before in India’s history- IFSC NSE, which began its operations on March 3rd, 2022.

Indian investors who wanted to invest in American firms had to do so through mutual funds (under SEBI regulation). IFSC has made this simple by allowing users to purchase and sell directly through the NSE IFSC Exchange. 

So far, the NSE IFSC has been granted permission to trade receipts for 50 US-based equities. From Thursday onwards, however, just 8 will be accessible for trading. Amazon, Alphabet, Apple, Meta Platforms (Facebook), Microsoft, Netflix, Tesla, and Walmart are among them.

Adobe, Berkshire Hathaway, Chevron, Johnson & Johnson, JP Morgan, MasterCard, McDonalds, Morgan Stanley, Nike, PayPal, Visa, and are among the companies that will be added gradually. The trade date has yet to be determined.

What is NSE IFSC?

The NSE IFSC was incorporated on November 29, 2016, and is a wholly-owned subsidiary of the National Stock Exchange of India Limited (NSE). Stock exchanges in the GIFT City are allowed to provide securities trading in any currency other than the Indian rupee. As a result, the NSE IFSC, which began trading on June 5, 2017, provides USD denominated trading in a variety of items.

Index derivatives, stock derivatives, currency derivatives, commodity derivatives, and debt securities are among the instruments traded at the NSE IFSC.

What is NSE IFSC receipt?

A Depository Receipt is similar to a piece of paper that represents the shares of a company in which you have invested. Global Depository Receipts, or GDRs, are bank certificates issued in many countries that may be purchased and traded on regulated markets exactly like equities. When corporations strive to raise funds from both domestic and international markets, they issue DRs. 

IFSC Receipt is a tradable financial instrument in the form of an unsponsored ‘depository receipt,’ which means it’s a derivative product that allows investors to trade these 8 stocks. When compared to the underlying securities traded on the US markets, investors have the option of trading in fractional quantities. You may now acquire shares in the US and issue receipts against them, which will be known as NSE IFSC Receipts, just like you can buy shares in your own country.

Within the restrictions of the Reserve Bank of India’s Liberalized Remittance Scheme, retail investors in India can trade on the NSE IFSC platform (LRS). The annual limit is presently fixed at $250,000.

Investor Eligibility

Persons residing outside India, non-resident Indians, and individuals residing in India who are qualified under FEMA may invest monies overseas to the degree permitted under the Reserve Bank of India’s Liberalized Remittance Scheme. 

Investing via IFSC

Indian residents will need to create a demat account with the IFSC. Investors will be able to hold the depository receipts in their own GIFT City demat accounts and will be eligible for corporate action advantages on the underlying stock. 

Taxation

For the purposes of filing income tax returns, the revenues will be deemed foreign assets. Long-term capital gains will be taxed at 20% with indexation, while short-term capital gains will be taxed at the slab rate.

Risks Involved

Risks exist with everything, including international investing. Some important risk considerations to consider are: 

  • Market Risk- Investing internationally exposes you to foreign economies, each with its own set of economic, political, and market concerns.
  • Currency Risk—Currency rates are susceptible to volatility. Rates fluctuate, and returns fluctuate as well.
  • Concentrated Risk- If investors are not attentive, being exposed to a purely concentrated portfolio might result in significant losses.  

ETFs vs IFSC Receipts

Even though IFSC opens up a new investment possibility for Indian investors, with a straightforward investment process, trading in fractional quantity value, entitlement for corporate action advantages on the underlying stock and low charges, it is not feasible in terms of diversification benefit to your portfolio. 

IFSC allows you to take up positions in specific companies thus paving the way for concentration and idiosyncratic risk. On the other hand, ETFs like Motilal Oswal NASDAQ 100 ETF attempts to link the performance of the NASDAQ-100 Index (before fees and costs) as closely as possible, subject to tracking error thereby giving you the opportunity to invest in variety of stocks rather than a single company. This gives the benefit of diversification and stabilizes price volatility.

Looking at the historical models, it can be deduced that investing in mutual funds has had relatively less volatility for most of the periods.

Source: Google Finance

Notice the high volatility in Facebook as compared to the Motilal Oswal Nasdaq 100 ETF

Final Thoughts

IFSC offers Indian investors a new investment option with a simple investment process and affordable costs. When compared to the underlying shares traded in US marketplaces, you will be able to trade in fractional quantity value. Investors will be able to hold the depository receipts in their own GIFT City demat accounts and will be eligible for corporate action advantages on the underlying stock.

However, it is advisable that investors who have conducted extensive fundamental analysis of a company and finds that particular company significantly undervalued/overvalued may opt to buy/sell the shares of that company. On the other hand, to take advantage of diversification and expertise, one may choose an ETF or an index fund.

Notable ETFs/index funds currently available for taking US equity exposure:

  1. Motilal Oswal Nasdaq 100 ETF
  2. Mirae Asset S&P 500 Top 50 ETF
  3. Kotak Nasdaq 100 FoF
  4. Mirae Asset NYSE FANG+ ETF

A word of caution – ETFs replicate the market and they are vulnerable to liquidity risk and tracking error. While currently there is ample liquidity in almost all the ETFs mentioned above, one must carefully monitor the liquidity in ETFs managed by Mirae AMC as they were recently launched. Motilal Oswal Nasdaq 100 ETF is one of the oldest ETFs and has time and again proven to be one of the best funds for US tech exposure.

Disclaimer: Only for informational purposes, no recommendations

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