Smart investing is all about reducing risks while maximizing returns. The trick lies in the diversification of your portfolio with some stable assets, balanced by fast-growing securities. One of the ways to achieve this goal is through geographical diversification. With a judicious mix of securities, you have a good chance of multiplying your returns while taking part in an exciting and fast-evolving investment avenue that offers a wide spectrum of choices.
Diversifying cross geography is when we start looking at different markets. While many Indian investors today are savvy about diversifying their portfolios, even seasoned investors fail to consider international markets. It allows you to take advantage of different types of investments, macro policies, political environments and currencies of the global market. More importantly, it limits your exposure to domestic exchanges and diversifies it across different markets, thereby reducing the impact of volatility.
What are Your Global Investment Options?
There are three ways through which you can start your global investments. You can pick any one of these options or use a mix. Keep in mind geography when making your decisions.
You can use digital platforms that allow you to invest directly into global markets. For easy investments, you can try apps that offer access to foreign stocks. Alternatively, you can try Indian brokerages, most of which now offer access to the key global markets. You can also open an account with international brokers that offer services to Indian traders, such as TD Ameritrade, Interactive Brokers, and Charles Schwab.
Your direct access allows you to invest not only directly in stocks but also ETFs, active funds in different markets that you believe have future potential. For example, an ETF focused on battery technology, or clean energy or even China. You should note that the Reserve Bank of India (RBI) currently limits the amount of money you can send abroad to $ 250,000 per annum under its Liberalized Remittance Scheme (LRS).
Investing in index funds/ETFs:
One of the indirect means of investing in global markets is through exchange-traded funds or ETFs or mutual funds that invest in foreign funds. In other words, you can invest in a mutual fund in India. This mutual fund in turn, invests in one or more ETFs or index funds or securities outside India, giving you indirect exposure to foreign markets. This is your best first bet to dip your toe into geographic diversification.
Most asset management companies (AMCs) in India are launching international funds. For example, recently HDFC Mutual Fund announced a global scheme to invest in funds across 23 countries. The advantage of taking the indirect route is that you don’t have to open a brokerage account to start or a hefty amount.
Invest in an international fund:
International funds are equity funds that are owned and operated by foreign experts to invest in instruments in their home country. While there are RBI regulations to be cognizant of, this may be another way to get exposure to foreign markets while relying on experts from those countries.
Benefits of Global Diversification
Below are some of the most prominent reasons why you should consider diversifying your investments.
Markets around the world perform differently at different times. Hence, as an investor, if you have a diversified portfolio spread across different geographies, you allow your money to deliver better risk-adjusted returns.
Historically, the rupee has depreciated 2-3% per year against the dollar. Therefore, any investment in the dollar (USD) can imply a 2% to 3% bump in return just through differentiated currency exposure. Investing in an international asset can provide a natural hedge against rupee depreciation and global market volatility.
International investments offer a plethora of new opportunities. For example, if you do you believe in an international innovator’s vision and want exposure to their company stock, you can get it. Those with an appetite for differentiated investments can leverage geographic diversification to participate in different pockets of the market that they believe will drive larger parts of future value without having to restrict themselves to what is available in India.
Things To Keep In Mind Before Investing Globally
Opening a brokerage account that gives you direct access to foreign markets is currently expensive. As you start this journey, be cognizant of your per transaction costs, any minimum billing, etc, to ensure you are calculating a fully loaded cost of exposure to a foreign market.
Gains made in another country may attract taxes in that country. You may be required to file a tax return in that country. Further, as you are a tax resident of India, you may have to pay taxes in India as well. There may be tax credits you can claim but there is a whole new host of taxes that you must understand before you dive in. In the same vein, you must ensure that your brokerage or fund is able to provide you with the relevant reports and gains calculation for your need to file your taxes.
Indians may believe they have a better understanding of their own home market. However, when it comes to other countries, there can be nuances of political environments, changing regulations, disclosure requirements, macroeconomic policy, among others, that we may not fully grasp about another country. Therefore, it is important to either educate yourself or invest through an expert/ index fund for basic exposure before looking to take asset or security specific risk.
Most products available from Indian mutual funds for international exposure focuses on equities. However, needless to say, there are several other very large asset classes that are currently not available for Indians to invest through mutual funds. Therefore, as you plan your asset allocation, remember that this exposure is part of your equity basket.
Investing globally is slowly gaining traction in India with large AMCs promoting and offering fresh products for this exposure. In the future, it is possible that a global fund may become your starting base for investing and slowly you will add on different countries, asset classes, etc, to tilt your risk exposure in the direction you want to go in. However, as a starting point, not more than 10-20% of your equity exposure can be in foreign funds to diversify away from India specific-risks. Once you learn the ropes of investing globally, you can look at increasing your exposure.