Weigh the pros and cons

Broadly the options can be divided into three categories, I replied.

The first is to purchase assets directly in a foreign country. This includes investing in real estate,shares,mutual funds or fixed deposits abroad. These investments will be subject to the monetary ceiling of 200,000 per person per annum,as per Reserve Bank of India RBI directives.

The second will be to invest in global mutual funds marketed in India. These funds invest in stocks of companies listed on stock exchanges overseas. One pays for these purchases in Indian rupees. This category includes the newly launched exchange traded fund ETF that tracks the Hong Kong stock index. There is also the soon-to-be launched Indian Depository Receipt IDR. An IDR is essentially the stock of a foreign company listed on an Indian stock exchange. For example,the Standard Chartered IDR is a way for Indians to own shares of this global bank.

The third option is to invest in gold,silver or other precious metals. These are safeguards against a currency crisis since their price in India is linked to the international price in US dollars.

Shekars eyes brightened up. During the currency crisis many Asians sold their gold. This was because it was the only asset unaffected by the collapse of the local currency, he said.

Investments in commodity futures such as those of crude oil or metals such as copper,aluminum also provide a hedge against local currency devaluation. This is because their prices are in sync with international prices.

Which of these options do you recommend? asked Shekar.

Risk-return trade-off

Unfortunately,there is no one size that fits all, I replied. The choice would depend upon a number of factors. Some of these include your tax bracket and ability to understand the risk-return trade off associated with these financial transactions.

The first option to invest directly should be used only by those who are financially savvy. This is because there is a need to understand the law and the economic environment of the foreign land before choosing an instrument. One also needs to know the taxes payable and the post-tax returns in Indian rupees. Further,one would need to fulfill the legal requirements like registering yourself with a foreign broker to buy shares and so on.

Unfortunately,those who wish to have a second home outside the country will also have to go through all the necessary formalities. But be warned that real estate purchase anywhere in the world should not be done solely on faith. Do all the due diligence that you would do in India.

The second option of investing in international mutual funds is easier since one can buy the mutual fund in Indian rupees. One does not have to bother about the legal issues of a foreign land.

The third option of buying gold is the easiest 8211; something that Indians have been doing so for years. Of course,buying futures should be done only by those familiar with trading futures.

Exchange-rate volatility

All the three options have one thing in common 8211; their prices will change based on the variation in exchange rate. For example,if you owned an asset worth 1,its price today is,say,Rs 46 because the exchange rate for the GREENBACK to the Indian rupee is 46. But if the rupee strengthens to Rs 40 per dollar,your asset value in rupee terms will depreciate to Rs 40. A through understanding of this phenomenon is mandatory before making any foreign investment, I said.

I think for a middle-class individual like me,I will stick to the second option of buying global mutual funds in Indian rupees, Shekar commented.

Conclusion

That may not necessarily be the best option under all circumstances although it is the easiest to execute, I said. This choice will protect you against currency devaluation but not against other calamities. For example,in case of war it is possible that Indian stock markets and financial institutions get closed down or destroyed. In these circumstances,your global mutual fund or an ETF may become inaccessible. However,those who own assets abroad will be able to access them from outside the country. A house may actually provide a safe place for you and your family. So do not jump to a hasty conclusion. Weigh up the reasons along with the resources that you are investing abroad and then choose wisely.

Shekar smiled. He now had a lot to ponder about.

The author Veer Sardesai,BE,CFP,MBA IU,USA is the chief executive of Sardesai Finance. ceosardesai.com