With a variety of seamlessly accessible options, investing globally is as simple as investing in domestic markets.
By Tarun Birani
The financial equivalent of placing all your eggs in one basket is an overemphasis of investments in a single country. Exposure to global investments will have its benefits and drawbacks like any other investment, but if executed with in-depth insight and foresight, it could be exceedingly beneficial.
Here is what you must keep in mind before investing globally:
- Get yourself thoroughly acquainted and invested in the domestic equity market first.
- Accumulate the essential knowledge and experience in domestic markets.
- Build a substantial risk appetite before you proceed to venture into global equity investments.
- And remember, global equity investments bring with them country risks as well as currency risks.
Globally very few HNIs would risk having invested all their earnings in a single country. The probability of allocations across geographies is a powerful construct for any investor. Precisely as no single asset class — be it equity, debt or others — can ceaseless be a top performer, so also no single country or geography can continue to outperform year-on-year. Diversification of investments across geographies gives your portfolio that much-needed balance to withstand any future economic, political or natural distress that may incidentally affect your investments.
There are myriad reasons why investors choose global funds; some are for the sole purpose of benefit from portfolio diversification, while others for future overseas currency requirements like travel, education or current expenses. With a variety of seamlessly accessible fund options at hand investing globally is as simple as investing in domestic markets.
As evolved investors, it is wise to diversify your assets in instruments that give you exposure to top global MNCs and be a part of their success stories. For an amateur investor, taking the mutual fund route can ensure the benefits of guidance and insight by a professional fund manager investing on his/her behalf.
Invest in Global leaders, innovators
Today we have access to innumerable products and services that originate from overseas markets. Take, for instance, innovators of your phones, laptops or even apps that you use daily; we acknowledge the futuristic approach of these foreign innovators and their ability to leap beyond bounds with their capabilities.
Why don’t we use our knowledge to benefit from the advancements of the organizations like Apple, Google, Tesla and more? In the past, accessibility and investments in true global companies may have been a complicated process but today with global investment funds accessibility is no longer a hurdle.
We now have the opportunity to invest in global giants and sectors that are not listed in India. This conveniently gives us access and stake in organizations of the future that are yet untapped by Indian markets.
Access new growth opportunities
The inclination of investing solely in domestic markets is known as ‘home-country bias’. It is natural for us to favour organizations whose products and services we are familiar with. Unfortunately, a home-country bias leaves us at higher risk in case of domestic economic fluctuations. Take the 2016 demonetization scenarios which left the banks on their knees and markets in a tizzy.
Why not benefit from international trade developments? There is a vast range of funds available in the market today, though no single fund comprehensively covers investments across the globe. Each fund/scheme will be either geography-based like US-based equity funds, European markets or Asian emerging markets while some are sectorial, for instance, gold, mining, etc.
A keen eye on political and trade developments overseas can ensure you invest prudently. On a cautious note, investing without insight may let you gain from an appreciating dollar, but there could be a converse risk factor in scenarios where the dollar depreciates.
Correlation of different economies
We cannot ignore the fact that the world is financially interlinked today with cross-border interconnections and inter-dependencies. In 2018, the S&P 500 index, which is considered to be one of the best representations of the US stock market, recorded approximately 42.9 per cent of foreign revenue exposure. As mentioned earlier, there are opportunities to benefit from.
A comparison between Sensex and Dow Jones indices shows the even distribution of sectoral indices in US markets versus the financial sector which dominates the Indian indices, the eight times stronger market cap of combined DJIA in comparison to that of Sensex, the lower dividend yields of the Indian index and the longer and higher returns by Dow Jones when compared to Sensex. No matter how interconnected the world gets, organizations will continue to be largely influenced by their domestic economic and geopolitical events.
Save-up for overseas expenses
Global equity investments are perfect for future overseas expenses. Plan and estimate the expenses to be incurred for future travel, educational expenses, medical expenditure, real-estate investments, etc.
Overseas investments today are a far simpler process than it once used to be. One can invest through the LRS route by directly buying ETF & global stocks in dollars through facilities provided by international brokers with a limit of $2.5 lakh.
The other way is by parking your investments in feeder funds, index funds etc which are then transferred to another fund that operates in the overseas markets. This translates into the fact that you are investing in Indian Rupees, in an Indian fund house and not a dollar investment with benefits of currency hedging, international trading, taxation and more.
Invest your money in the overseas markets to accrue and direct the money for foreseen expenses, giving you the benefit of currency hedging. This is a positive step especially when the rupee depreciates over periods. On the flip side, there are risks too; the US markets may outperform the Indian markets, but this may not be true for other markets across the globe.
Additionally, the debt fund taxation of international funds and ETF’s under the LTCG rule benefits those investments that exceed 36 months’ holding periods, but from an asset allocation strategy, international investing is important and up to 15-20 per cent of the portfolio can be diversified in the same.
(The author is Founder & CEO, TBNG Capital Advisers)