Is buying international stocks a good idea?

It is not the products that create wealth in the long run, but the ability to stay invested by having investing clarity and purpose.

international stocks, invest, buy, faang stocks, returns, mutual funds
Most NFO’s which act as feeder funds into international funds fixate on themes that have outperformed in the recent past.

By Mayank Bhatnagar

These days, the huge amount of “information clutter” is driving a herd mentality within investors, who are chasing the next new quick profit-making idea.
Since 2020, we have seen several offerings hitting the market which gave people exposure to international stocks (mostly based on returns over the last 6-12 months). People rushed in to partake – and the market did exactly what it does to people who frantically chase returns – that is, show them huge losses!

If only someone had paused to review or to take expert advice; is international diversification even a requirement for retail investors? Is it tax friendly? Will it expose me to currency risk? Is past return reason enough for me to invest in any product? Am I being a victim of “sales diversification” under the guise of portfolio diversification?

This fascination with international investing has been further magnified by a lot of new age apps that, unfortunately, fixate more on increasing their app download numbers than on achieving genuine long-term wealth creation for their clients! Our experience tells us that the decision to diversify into international stocks and mutual funds ranges from “unnecessary” as best-case to “severely value eroding” as worst case.

Also Read: Is international diversification really beneficial for Indian investors?

Most of these investing failures originate with the initial mindset itself. It is a well-known fact that when it comes to investing, why you invest matters just as much or more than ever.

And if you were to interview a random sample of international fund or stock investors, you will find that nine out of ten of them would have invested for the wrong reasons: the first being the “hindsight bias”, and the second being “speculation”.

The industry is at least partly to blame for the first phenomenon. Most NFOs which act as feeder funds into international funds fixate on themes that have outperformed in the recent past instead of those that still have deep value embedded in them (and are therefore a “tough sell” due to their poor 1–3-year returns).

Gold rallying? Launch a fund that invests in international stocks of gold mining companies. FAANG stocks rallied 50%? Promote and market a U.S Tech focused fund. The list goes on – after all, nothing sells like the allure of past returns. Unfortunately, what goes up comes down – and investors in these funds usually end up deeply disappointed (and harbouring trust deficits about mutual funds as an asset class).

Also Read: How diversification in US stock market helps Indian investors

The second reason why a lot of so-called investors flock to international stocks is to speculate – that is, to buy a stock for $1 and quickly sell it for $2. It is a well-known fact that speculators end up losing money pretty much every time, so that doesn’t end well either. In fact, the average holding period for most international stocks and mutual funds in India is abysmal, so that pretty much drives the point home.

There are also several unforeseen risks too. The first, of course, is currency risk. If your international stock rises by 10% but the underlying currency falls by 10%, it becomes a zero-sum game. The reverse applies too, of course, but it adds a second layer of speculation on an existing layer; usually with disastrous consequences. As if timing one asset class was not hard enough!

On top of the currency risk, we also have prohibitively high remittance costs and regulatory risks. For instance, we now have a whopping 20% TCS (Tax Collected at Source) for remittances being made towards the purchase of international stocks. And while this money can be recovered while filing your returns, it really isn’t sensible to block off such a large portion of your investible surplus for so long.

Mutual Funds are not immune to these regulatory shocks either. You might recall that when the regulator restricted overseas investments by asset management companies last year, a lot of goal-based SIPs in international funds came to a sudden halt. It would be fair to assume that these occasional “jolts” will continue to curb the flow of capital from India abroad.

In the end – more than fund selection, what matters is how and why you invest. Do you have clearly defined goals? Have you set the right expectations with respect to risk/reward? Are you disciplined with your investments? Are your behavioural biases in check? Do you invest in an ad hoc manner or in line with a clear financial plan?

For successful investing, perseverance is key. This ability to stay invested comes from knowledge and understanding. Without this, investing can be very risky. The adage of sticking to a known devil rather than the unknown one is a very useful one in this case.

We genuinely believe that for any retail investor who has a cumulative portfolio of less than $500,000 (Rs. 4 Crores), there are enough and more opportunities to diversify effectively within the vast array of domestic investments itself. Remember, it is not the products that create wealth in the long run, but the ability to stay invested by having investing clarity and purpose.

( Author is Chief Operating Officer, FinEdge)

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First published on: 15-04-2023 at 10:45 IST