A globally diversified portfolio helps you take advantage of market cycles in different countries, depreciating currencies and manage risks better.
By Palanisamy Saravanan
As an investor, just think about the goods and services that we use in our day-to-day life. It could range from ordering food online, watching movies on Netflix, placing orders for an eBook on Amazon or even searching something on Google. Many of these companies have their base outside the country and are not listed in Indian stock exchanges. Have you ever thought about investing in such companies. Let us discuss in detail about going global in terms of portfolio diversification.
Why go global?
The benefits from international diversification were empirically demonstrated in financial literature during the early 1960s. These empirics have shown that by diversifying across nations whose market cycles were not perfectly correlated, investors could lower the risk of their portfolio returns at the given level of expected return. As you know, the top performing companies keep on changing every year. Thus, it does not make sense to concentrate or make all your investments in a particular region or asset class. Another reason is to take advantage of the depreciating currency. So, it is a good idea to have a globally diversified portfolio.
Nuances of investing abroad
To invest in the shares of international companies, as an investor you need to open a separate demat and trading account with a recognised and authorised broking house. As of now, Indian investors are permitted to invest up to $2,50,000 (around `1.88 crore) under the Liberalised Remittance Scheme (LRS). Brokerage for investing abroad will vary from 1 cent per share to $2.99 per trade, depending on the plan one opts for. Directly investing in overseas shares involve significant amount of research and the right mind- set. At the same time, one could also go for Exchange Traded Funds (ETFs). Such funds normally track an index and there are a few Indian fund houses that already have ETFs based on international indices such as Nasdaq and S&P 100. For investing in such funds, you can use your existing demat and trading account.
Mutual funds route
This is probably the easiest way for investors to have an international exposure. Many Indian fund houses have such schemes which invest in overseas equities. For instance, a popular fund house offers index funds which track the US S&P 500 and Nasdaq 100 indices. To invest in such funds, there is no need to have any separate trading account.
Investors can invest in these funds like any other typical mutual fund, either directly through a distributor. You can also invest via the SIP route, with a minimum of `500 per month.
Some investors may have views against global diversification arguing that everything is so interconnected today that overseas investments may simply overlap domestic ones. But that is not the case as companies tend to act in ways and means according to the situation in their country of domicile. They tend to respond to local economic and geopolitical events more than events outside their borders. And different countries’ economies often tilt toward different market sectors or industries.
To conclude, it is prudent for investors to branch out globally and international diversification definitely helps in managing risk and positioning your portfolio for long-term growth.
To invest in the shares of international companies, you need to open a separate demat and trading account
You can invest up to $2,50,000 under Liberalised Remittance Scheme
You can invest in ETFs based on international indices such as Nasdaq and S&P 100 or mutual fund schemes which invest in overseas equities.
(The write is a professor of finance & accounting, IIM Tiruchirappalli)