How does international diversification fit into this? Foreign investments have fallen less and over long periods have very low correlation with Indian equity markets.
By Pratik Oswal
“The US indices have outperformed Indian markets by 8-15% in the last decade” is how US investing is sold. Investors should not give in to such marketing practices. Investors expecting the same level of performance in the future will be disappointed. So why should investors look at international diversification?
We have seen over the last two months that equities fall together. Whether someone has invested in 5 or even 50 mutual funds, they have seen a decline in portfolios of over 20-30%. Diversification across different asset classes has proven to be effective in these times. If someone had added gold,
international equities, debt and equities – their short-term portfolio loss would have been much lower.
How does international diversification fit into this? Foreign investments have fallen less and over long periods have very low correlation with Indian equity markets. By taking out country risk – investors are making their portfolios less volatile. For example – correlation of international indices such as the NASDAQ and S&P500 with Indian indices is less than 15%. What this means is that investors choosing to diversify with international funds can expect their portfolios to move differently to Indian indices (just like gold).
Buying the dollar as a currency
Almost every working professional is spending in dollar terms today. We earn in rupee but pay in the dollar. We are buying Nike shoes, Apple/Android phones, Hyundai cars, and sending our kids to school outside India. For example – the cost of education in the US has increased 2-3x over the last decade. This is mostly because of the rupee decline. Keeping spending in mind – it’s crucial to hold some proportion of investments in dollar-based investments.
Need for international diversification comes at the point where the world is becoming more global. In addition to our spending patterns – business models are getting a lot more global. We all use Flipkart, Amazon, Instagram, WhatsApp daily. Today a Maruti is competing with a Kia or a Hyundai. With these forces – its important for the investment portfolio to evolve with competitive trends. Having brands such as Amazon, Google, Facebook, Coca Cola in the portfolio enables investors to have the very best companies with them at all times. The Indian market is small in comparison to global standards and having global exposure allows investors to who grow with some of the biggest companies out there.
How does one do it?
There are multiple US-based international funds in India today. Investors have the option to use the LRS (Liberalised Remittance Scheme) to send money abroad before buying US-based stocks and funds too. LRS is currently expensive and not easy to set up. By choosing international index funds (most popular and proven to be effective), investors can ensure low fees while getting exposure to the best companies globally. Data shows that index funds fare better over long periods.
A sound asset allocation strategy based on the individual's risk profile is a good starting point. Advice would not to go all-in but build it in a way where an investor can have portfolio exposure of at least 10-15% in the next 1-2 years.
(The author is Head of Passive Funds Business, Motilal Oswal Asset Management Company)