By Deepak Singh

Everybody invests with the aim of generating positive returns. In a sense, this could be expressed as making your money work for you. The investment could be aimed at creating an income source like bank interest or via dividends and most frequently to simply make profits. Any investment would entail some amount of risk because one cannot get better returns without some risk. Usually, this is explained as low risk getting low returns (for example, bank interest) while higher risk taken is expected to get higher returns (for example, real estate investment or stocks).

Diversification Key to Maximum Return

In any investment effort, the aim is to get maximum returns with the lowest estimated risk. Diversification is then a natural corollary. The investment must be made across several different assets so that no one event can wipe out your investment. For example, investments only in stocks or only in real estate would be considered risky, as any incident in either can harm the investment made. And there are any number of specific examples of this where listed companies have gotten into serious trouble in a short time with their share price, or real estate companies have failed to deliver or simply gone bust.

Diversification of investment is usually done via direct investment in stocks, mutual funds, government bonds and private bonds, or gold and real estate. These are traditional avenues. More sophisticated investors can move to items like paintings and antiques as well as other seemingly peculiar investments. But the most obvious diversification of one’s portfolio can be in foreign stocks, especially US stocks. Just as one diversifies across sectors, similar diversification should also be done across geographies.

Why US Stocks?

So, why should US stocks specifically be a part of one’s portfolio? The answer is not hard to find. Equity is a subject broadly understood by the investing population. With globalization, liberalization, and democratization of information due to the communications revolution, identifying US companies to invest in now involves the same amount of complexity (or simplicity) as for India-listed stocks. So, that is true diversification.

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Secondly, any depreciation of the Indian Rupee vis-à-vis the US Dollar makes the portfolio appreciate. E.g., if the USD was Rs 73 some time ago when you invested in an equity share and is Rs 80 now, then that 10% appreciation from Rs 73 to Rs 80 is part of the investor’s benefit, apart from the possible actual increase in share price. So, you are investing in the equity share as well as in USD by default.

Apart from this, one can invest in not just India’s best but the world’s best brands, whose customers are typically GenZ and therefore at the edge of the technology and marketing paradigm. Gen Z keenly follows the growth story of bigshot companies like Apple or Google and is interested in being a part of it. Some of the best investment ideas, including top global brands in technology and FMCG, are listed in the US and we are now familiar with them.

And the best part is that the US market offers the facility of buying fractional shares where investment starts at a minimum of USD 1 in that share. Therefore, even if the share is priced at USD 100 per share, you can still invest USD 1 in it. This facility is not yet available in India.

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Besides, an Indian resident is allowed to invest up to $ 250,000 per year in the US stock market under the RBI’s Liberalized Remittance Scheme (LRS). This limit is per individual, including minors, which means a family of 4, can remit up to USD 1 million per financial year.

This investment in US stocks can have specific advantages as well. Since this investment is in USD and is allowed by the government of India, it also helps build a substantial corpus for your kids if they are interested in studying abroad. The sale proceeds in USD can directly be used to pay tuition fees in the US or elsewhere. Depending on your risk appetite, one could invest between 20% to 40% of their equity corpus in US stocks.

In sum, the aim of investing in stocks is growth. Just like investing only in FDs is self-limiting, similarly investing only in the overall fixed income space is also self-limiting. Portfolios should be diversified to even out risk. So stocks, gold, and real estate come into play. Eventually, the portfolio should give returns that are above what one would normally get or expect. In this scenario, investing in US stocks is a natural outcome – why not invest in the world’s largest, best known, well-regulated market with the highest liquidity and having most of the world’s largest and most successful companies? It’s hard to beat that logic.

On top of that, the US markets have given decent returns over most decades. Add 5% average rupee depreciation every year which adds to rupee returns. This strategy keeps you invested in your favorite investment destination – equity – while reducing your dependence on only the Indian equity market. Clearly, without exposure to US equities, your portfolio diversification is not complete. Go for it!

(Author is Chief Business Officer at Reliance Securities.)