Post-Diwali of 2010, Indian equity markets have taken quite a beating. The 30-share benchmark, the Sensex, from the peak of 21,000 points to now at 18,000 levels in a matter of less than three months has set the cat among the pigeons.
But I would say we are still over-reacting. Inflation on the supply side seems to be the main culprit not only in India but also in other emerging markets. We have had crowds spilling over in far-off Tunisia, where the inflation is in single digit, and pushing the government of the day out.
One of the things which a long term investor does is asset allocation based on one?s risk profile and then do a portfolio rebalancing to ensure the asset allocation methodology is followed and maintained. With increasing disposable income, investing in multiple asset class and across geographies is something, which a normal investor is not aware and if aware not keen to look into the possibilities.
In fact, John Templeton made his monies by investing across geographies and across asset class, long before it was practiced by the American and European fund managers. And we have Warren Buffett, who made majority of monies by investing locally. The bottom line is both made money and in their unique ways. The common thread which also runs is that both understood what exactly what one was entering into before going ahead.
In today?s scenario, we have the American equity markets delivering double digit (13.4%) returns for the period January 2010 to January 2011 and the Indian markets in the same period has delivered only single digit (9%) returns.
We hear a lot about the GDP growth story and how with the growth, the market goes hand-in-hand. Nothing can be farther from the truth. The GDP numbers talk a story about the past and investing talks about future. No single market can be the best performing market for two years in row as history tells us this.
It?s time that as part of overall investment process, we take a look at the possibility of a 5% exposure to geographies other than India, without diluting the asset allocation premise. You can invest abroad $200,000 directly as per the Reserve Bank of India (RBI) guidelines. And in the recession of 2008, smart investors did pick up good properties abroad through this medium.
However, we do not recommend that you restrict yourself to investment in properties. Say an exposure of $10,000 – $25,000 can also be considered for investment directly in mutual funds based abroad and direct equities. We have few of the local brokerages allowing one to buy securities sitting at your desk. The formalities can at times can make the process cumbersome.
We also have mutual funds, based in India, with mandate to invest abroad. But to expect the local fund manager to keep track of foreign investments and act and generate decent profits could be a stiff task. Alternatively, one could also invest in Index fund, tracking a certain index.
The flip sides of investing abroad are currency risk is one of the major risk. Say if the rupee appreciates viz-a-viz the dollar, then the return generated, when converted into the local currency will be lower.
Taxation of the investments is another issue which needs to be considered. Though this article lays stress on investing abroad, it?s only on the basis of risk diversification that an investor should look at geographical investment and that too after understanding the product well.
* The author is founder and managing partner, Zeus WealthWays LLP