By Shruti Jain
A well-diversified portfolio is critical to long-term success in investing. While most of us build a portfolio with varied asset classes, market capitalisations, and sectors, we still fail to diversify across geographies.
If you only invest domestically, you could miss out on growth opportunities. Going international with your investments can help you reduce your risk, reduce portfolio volatility, boost returns, and enable you to invest in some of the most valuable and renowned companies across the world like Apple, Amazon, Tesla, and Samsung. Yet many Indian investors choose to limit their investments to Indian companies, resulting in what’s known as home-market bias. While it’s human nature to favour and trust things that we know best, it limits an investor’s universe of available opportunities.
Diversification is a simple way to boost long-term investment returns while reducing risk. Investors should have some international exposure, though how much exposure will depend on your risk tolerance. Allocating between 5% (for conservative investors) and 25% (for more aggressive investors) of your total portfolio to global equities is a good rule of thumb.
The good news is, Indians are allowed to invest up to $2,50,000 abroad (approx. Rs 2 crore), per financial year, under the liberalised remittance scheme (LRS).
As a beginner, going global may seem daunting. But it needn’t be. Once you’ve decided to add a flavour of international stocks to your portfolio, you can easily create a global portfolio in a few clicks.
INTERNATIONAL STOCKS PORTFOLIO
There are several ways to gain exposure to international equities. Here are some of the most popular options.
Exchange Traded Funds
The easiest way to add international stocks to your portfolio is by investing in exchange-traded funds (ETFs) that hold a basket of global stocks and bonds. You can buy and sell them like a stock. With this option, you can get exposure to global stocks without opening another account. Plus, the inherent diversification offered by ETFs relieves you from the cumbersome task of individual stock picking. There are various international ETF options in India based on different investing themes (like technology) or geographies (like US, Hong Kong) like Mirae Asset NYSE FANG+ ETF, Nippon India ETF Hang Seng BeES, and Motilal Oswal Nasdaq Q 50 ETF.
Global mutual funds
Investing in mutual funds provides a quick and highly diverse foreign component to your portfolio. Plus, you don’t even need and trading and demat account. You can identify mutual funds that invest in global companies using online screening tools on mutual fund platforms.
You will be spoilt for choice, as there are funds for every need. There are country-specific and regional funds or those that track different types of markets (developed or emerging) or themes. For example, if you want to benefit from the appreciation in gold, DSP World Gold Fund gives you exposure to companies involved in gold mining, if you foresee growth in Asian economies or far east you can look into funds like Franklin Asian Equity Fund or Edelweiss Greater China Equity Offshore Fund.
Foreign Direct Investing in Equities and ETFs
If you’re someone who likes to take charge of their investment, you can take a DIY route. Building up the international portion of your portfolio by investing in international stocks and ETFs directly is now easy, thanks to quicker digital KYCs and the growth of many international brokers worldwide. A lot of Indian brokers also facilitate international investing by partnering with an offshore broker. You can open an international trading account with an Indian broker who offers access to international markets through a foreign broker, or open an overseas account directly with an international broker in the target country. For example, Interactive Brokers give you access to all key global markets.
However, you need to understand the tax implications and also fund your account in dollars when you take this route.
Investors should approach international investing as a way to diversify away from their Indian investments, hedge their portfolios against country-specific risk and tap into potential growth opportunities. When in doubt, take the help of a financial advisor who can plan your asset allocation strategy, choose the best investment route, and even handpick the best investment options for you.
Also Read: Has the US stock market bottomed out?
Before you make any investment, make sure to check the transaction costs including the broker’s commission or expense ratio (in the case of mutual funds), currency conversion rates, and foreign taxes on capital gains and dividends.
(Author is CSO Arihant Capital Markets)