By Akshaya Bhargava
Why would anyone not want to diversify? But even though I am a big supporter of diversification, this is more than simply a rhetorical question. The answer is not completely intuitive because people think of diversification in different ways.
As a starting point, let us see how some advisors encourage us to think – “focus on the long term, invest in multiple mutual funds and forget about the short term as that is mostly noise.” This is conventional wisdom, especially in India.
This sounds eminently logical but in reality, this is self-serving and conflicted advice. This is because some advisors will guide you into products that generate fees for them. While their advice may be well-intentioned, it is not complete because it ignores asset classes and strategies that they do not cover.
In my opinion, we need different thinking – here is how I would approach the diversification question.
India or beyond?
I am convinced that the next two decades belong to India. So naturally, I want exposure to the Indian market. But if I was already in the Indian market, is there a compelling logic to expand internationally?
We cannot ignore that US markets have produced stellar long-term returns over the long term. As a matter of fact, there are only 3 indices in the world that have outperformed inflation over the last 40 years – S&P, NASDAQ and NIFTY/SENSEX. So as a long-term investor, notwithstanding my high conviction about India, I would want to diversify to the US markets.
For me, diversification is more about asset allocation than it is about funds or selection. My own asset allocation would be 1) Index Funds, 2) concentrated equity exposure (10-12 stocks) that is regularly rebalanced and 3) short-term opportunities.
In my experience, there is smart diversification and dumb diversification. Most advisors push you to the latter because they only propose products where they earn fees. In my view, what is needed is for you to make an intelligent and informed choice for yourself and most of the time, this does not require you to pay big (or any) fees to anyone.
Thanks to some innovative services, Indian investors can open an international brokerage account and use their LRS limits to make investments. Once you have a brokerage account abroad, you can buy global stocks, ETFs or Funds.
But more importantly, there are exciting new products from innovative companies that will completely change the landscape.
So, here’s how Indian investors can diversify in global equities.
Step 1 for me would be to open an account with a US broker. These days it is easy to do so using an Indian brokerage house.
Step 2 would be to transfer some money under my LRS limit of $250,000 per year to fund my US brokerage account. Once this is done, I am ready to trade, and I would start by creating an asset allocation.
Step 3. My first allocation decision would be to buy the Index (QQQ for Nasdaq and SPY for S&P 500). This would be a long-term investment and I would just keep track and not make any changes. I would invest around 50% of my capital in this bucket.
Step 4. I would look at investing 30% of my capital in international equity exposure. In India, we have seen how easy companies have made it for us to buy a portfolio of Indian equities through their curated portfolios. There are similar platforms available for US equities – InvestorAi has a US portfolio running on E-Toro with over 15,000 followers.
I like this option because it is very low-cost and easy to execute. I can buy the entire portfolio of US (or global) stocks with one click and then use a one-click rebalance. This way, I would get long-term exposure to US equities where the portfolio is actively rebalanced like what I would expect a mutual fund manager to do but without the fees.
Step 5 would be my allocation to Short Term Opportunities. This used to be a very difficult investing space that needed a lot of technical knowledge, access to expensive information and the need to watch the market at all times. No wonder 89% of day traders lose money.
But thanks to AI technology, you don’t need a ton of technical knowledge to generate investment ideas and thanks to trading BOTs, these ideas can be executed easily and at scale. But the real magic happens when you put the AI engine and the BOTs together because together, they can make it easy, efficient, and profitable to be a short-term investor.
In summary, I believe that it is not only possible for Indian investors to diversify, but that it is highly desirable. What you must do is have a strategy and create an asset allocation. Once you do that, there are plenty of tech tools that will make things easy.
(Author is WealthBasket Curator & Founder of Bridgeweave)