Global investing: Reduce risk, maximise wealth creation by deploying capital across geographies
Updated: Feb 03, 2021 11:28 AM
History has shown that global markets tend to move in different directions than Indian markets over long-term periods.
American markets have had a great run over the last ten years.
(Representational image/ REUTERS)
By Pratik Oswal
Global investing has taken off in a big way for investors in India. The recent outperformance of US-centric funds over India and the ability to play US consumer and technology companies with ease of access has paved the way to a better-diversified portfolio for Indian investors. What are the benefits of global investing?
Diversification of portfolio – Adding international funds lowers portfolio volatility for investors. How? History has shown that global markets tend to move in different directions than Indian markets over long-term periods. Hence when Indian markets perform poorly – global markets keep our portfolios stable (even our emotions). The table below shows that an allocation of 50% of our portfolio into a global portfolio can reduce volatility by 100%.
Dollar protection – Today, many investors spend their hard-earned savings on vacations abroad and international products. Also – the number of students leaving India and going abroad has exploded over the last decade. Vacationers and school-goers have noticed that the dollar keeps on getting more and more expensive every year. Last decade the dollar used to cost ~Rs.50, today is close to Rs.80. International funds provide access to some of the world’s largest companies and give investors the ability to invest in USD, thus protecting investors from future devaluation.
International Growth opportunities –Today, most investors buy and hold ITC, Hero Honda, HUL in their investment funds but buy Apple iPhones, Hyundai Cars, H&M clothes, Windows laptops, Adidas Shoes and use Airbnb instead of hotels. The reality is that the world is more open, and buying Indian stocks is not enough to create wealth. International funds enable investors to participate in the world’s biggest companies and brands. Stocks like Facebook, Google, Whatsapp can be easily accessed via international funds.
Don’t stick to US funds only – American markets have had a great run over the last ten years. Investors looking for Diversification should also look at other markets. The below table shows that it is impossible to time markets perfectly. Hence, investors looking for global Diversification should look for the US, Emerging Markets, and other developed markets for their exposure.
Use mutual funds to easier access – Investors looking at global funds can either set up brokerage accounts in the US or buy mutual funds directly in India. Setting up brokerage accounts can be time-consuming and expensive – but can be useful for investors looking for choice. Mutual funds, however, are cheaper and more convenient. Purchase and redemption are simple, setting up monthly investments (SIPs) too. There are no limits when it comes to investing abroad via mutual funds.
Use index products – Index funds have proven a lot more popular when investing in developed markets such as the US and Europe. They are low cost and deliver the highest performance over long periods. Most importantly – they are simple enough for investors to hold on to for decades.
In conclusion, investors who are looking for diversification opportunities should explore global investing. While India is a large and significant country, it remains less than 4% of the worldwide GDP. Hence, Indian investors today are missing 95%+ of wealth creation opportunities outside India.
(Pratik Oswal is the Head of passive fund Business at Motilal Oswal AMC. The views expressed are the author’s own. Please consult your financial advisor before investing.)
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