When you walk into an international airport, your passport allows you to board a plane to anywhere. In the world of investing, ETFs (Exchange Traded Funds) and ADRs (American Depository Receipts) are your passport.
Buying individual foreign stocks can be difficult. Which German car company is better, BMW or Mercedes? Which Japanese trading house is undervalued? Instead of trying to pick the needle in the haystack, sophisticated global investors simply buy the haystack. They do this using ETFs.
In this module, we will explore the specific instruments you can use to build a global portfolio, whether you are investing directly in Dollars or via Rupee-denominated funds.
1. The Global ETF Toolkit
The US market has the deepest and most liquid ETF ecosystem in the world. With a single trade, you can own thousands of companies. Here are the "Titans" of the ETF world that act as building blocks for any portfolio.
Invests in the 500 largest US companies. The default choice for US exposure.
Invests in the top 100 non-financial companies on Nasdaq. Heavy Tech bias.
One ticker to own planet Earth. 9,000+ stocks from US, Europe, Asia, and Emerging Mkts.
Invests in Europe, Japan, Australia, and Canada. Good diversifier from US Tech.
Why are expense ratios so low? In India, a large-cap mutual fund might charge 1-2%. VOO charges 0.03%. This means for every $10,000 invested, they charge you only $3 a year. This low cost is a massive advantage of investing in US-listed ETFs.
2. ADRs: Buying Non-US Companies
What if you want to buy Alibaba (China), Toyota (Japan), or Infosys (India) on the US stock exchange? You use an ADR (American Depository Receipt).
Most Americans (and global investors) don't have brokerage accounts in Tokyo or Mumbai. To solve this, a US Bank buys the foreign shares, holds them in a vault, and issues a "Receipt" (ADR) that trades on the New York Stock Exchange. Buying the ADR is legally equivalent to buying the stock.
How an ADR Works
3. The Two Routes for Indian Investors
Now that you know what to buy, how do you buy them? There are two main highways.
Route A: Feeder Funds (Fund of Funds)
These are Indian Mutual Funds that take your Rupees and invest them in international ETFs/Funds.
Examples: Motilal Oswal Nasdaq 100 FoF, Edelweiss Greater China Equity Fund.
- Pros: Simple. Buy via Coin/Groww just like any SIP. No need to convert currency.
- Cons: Higher expense ratio (Indian fund fee + Underlying global fund fee). Subject to RBI limits (sometimes funds stop accepting money).
Route B: LRS (Liberalised Remittance Scheme)
You remit money to a US Brokerage account (like Vested or Schwab) and buy ETFs/Stocks directly.
- Pros: Access to 5000+ ETFs. Lower expense ratios. You hold assets in Dollars.
- Cons: Wire transfer charges. TCS (Tax Collected at Source) on remittances above ₹7 Lakhs.
4. Comparison: Feeder vs. LRS
| Feature | Feeder Fund (India MF) | LRS (Direct US Broker) |
|---|---|---|
| Convenience | Very High (SIP possible) | Medium (Manual transfer) |
| Minimum Amt | ₹500 | ~$500 (due to wire fees) |
| Choice | Limited (~50 funds) | Unlimited (Any US stock/ETF) |
| Taxation | Debt Taxation (Slab Rate) | Foreign Asset (20% LTCG / Slab STCG) |
| Currency | INR | USD |
5. The Tax Implication (Critical Update 2024)
Understanding taxation is vital. The rules changed significantly in April 2023 and July 2024.
Indian Feeder Funds: If an Indian MF invests >35% in foreign stocks, it is classified as a "Debt Fund" for tax purposes.
• Tax: Gains are added to your income and taxed at your Slab Rate (e.g., 30%). No indexation benefit. This makes Feeder funds tax-inefficient for high earners.
Direct US Investing (LRS):
• Long Term (> 24 Months): 12.5% Tax (LTCG). This is beneficial.
• Short Term (< 24 Months): Slab Rate.
• Dividends: Taxed in US at 25% (withheld) + Taxed in India at Slab Rate (Double Tax Avoidance Agreement applies, but complex).
Summary of Module 7
Global ETFs like VOO (S&P 500) and QQQ (Nasdaq) are powerful tools that allow you to own the world's best businesses at a fraction of the cost. While Feeder Funds offer convenience, Direct Investing via LRS offers better tax treatment for long-term wealth.
But how exactly do you execute an LRS transfer? What is the TCS rule? How do you open a US account? In the next module, we will provide a step-by-step guide to The LRS Route.