India has the seventh-largest economy in the world, but it was not until the 1990s that it became possible for foreigners to invest in India. Since then, India became a rapidly growing emerging market. The “I” in BRICS stands for India and BRICS is an acronym that stands for Brazil, Russia, India, China and South Africa. Not only is each a large emerging market, but each country has a lot of influence in its own region. There are many investors who want to capitalize on these emerging markets. Here’s a look at India’s markets, available investments, opportunities and risks and regulations.
Consider working with a financial advisor as you diversify your portfolio by investing outside the U.S.
India’s Stock Markets
If you are interested in adding emerging markets to your portfolio, you might want to look toward India. India is not only an emerging market but its correlation with the U.S. stock markets is only about +0.29. This is a rather low positive correlation, making India a good candidate for diversifying your portfolio.
The two top stock exchanges in India are the Bombay Stock Exchange (BSE), established in 1875, which is the oldest. The largest stock exchange is the National Stock Exchange, (NSE) which was established in the 1990s. The NSE is the largest in terms of volume and has an index of 50 companies and a market capitalization of $2.27 trillion. The BSE has a market capitalization of around $2.1 trillion and an index of 30 companies. They are regulated by the Securities and Exchange Board of India (SEBI).
Risks and Opportunities of Investing in India
Opportunities:
- Even though current Prime Minister Modi is a rather authoritarian figure, India has kept the democracy it established after leaving Great Britain more than 60 years ago.
- The demographics of the country are robust in the long term since 85% of the population is under 55 years of age and very well-educated.
- There is an active movement toward shifting manufacturing away from China and toward India. If that continues and India can take advantage of it, it may overtake China’s economic growth.
- India’s growth rate is strong in the top global economic sectors of outsourcing and information technology.
- Investing in a stable, growing and emerging market like India could help with your portfolio diversification.
Risks:
- Even though India is ranked high regarding its purchasing power parity, currency risk is always still an issue when buying and selling securities between two countries.
- India is in a fairly unstable part of the world particularly with Pakistan on its western border and China on its northern border. India’s relation with both countries are unfriendly and sometimes violent. The geopolitical risk may be higher than average.
- India’s institutions and infrastructure are still underdeveloped.
Invest in ADRs
You can gain access to some of the stocks on the Indian market using only an online broker, a free app or your current brokerage company. Some Indian companies are listed on the NYSE and NASDAQ through the use of American Depository Receipts (ADRs). ADRs are depository receipts issued by Indian companies that can be purchased through your brokerage and traded on U.S. stock exchanges. ADRs are not available for all publicly traded Indian companies, but they are the most convenient way to make an investment in India.
Invest in Indian ETFs
Another convenient method of trading in Indian stocks is by buying their exchange-traded funds (ETFs). Indian ETFs are very similar to U.S. ETFs. Like stocks, they trade throughout the day on the exchanges, but they are baskets of securities like mutual funds. They are listed on the NYSE and the NASDAQ. You can purchase them from one of the digital wealth management companies like Betterment or a reputable broker like TDAmeritrade. A commission fee may apply.
Use an International or Indian Broker
You can invest directly in India’s stock market by opening an account with an international broker regulated by the U.S. Securities and Exchange Commission (SEC) or with an Indian stock brokerage regulated by the Indian SEBI. Both are going to be much more expensive than investing in ADRs or ETFs.
Interactive Brokers offers a world-class trading platform as an international broker. It offers special accounts for foreign nationals trading in the international markets. Their minimum investment is $10,000. They impose a minimum brokerage charge each month or assess a penalty. They also charge upwards of $500 for access to market research. You are required to have a one-time “Know Your Client” interview before opening an account. If you can open an account, you can trade equity and derivatives.
You can also open an account with an Indian broker although it is probably best to use a full-service broker so they can guide you regarding the complex Indian tax regulations, accounting conventions and market research for your possible investments. They can also guide you regarding investments.
The Bottom Line
India’s growing economy and young population bode well for the future of investing in the Indian markets. The low correlation of their markets with U.S. markets provides diversification. Currency risk and geopolitical risk are always present. Affordable investments are limited. Unless you are a high-net-worth investor, you may be better off sticking with ETFs. ADRs trigger various tax implications and ETFs are cheaper and fairly easy to purchase.
Tips on Investing
- India is not the only non-U.S. country with investment opportunities. A financial advisor can help you sort through which ones you should consider to best diversify your portfolio. Finding a qualified financial advisor doesn’t have to be hard. SmartAsset’s free tool matches you with up to three financial advisors in your area, and you can interview your advisor matches at no cost to decide which one is right for you. If you’re ready to find an advisor, get started now.
- If you want to determine what you should invest in for the benefit of your portfolio, use SmartAsset’s asset allocation calculator. Just input a few variables and it will provide you with help.
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