Smart investing is all about reducing risk while maximizing returns. The trick is to diversify your portfolio with stable assets, balanced by fast growing stocks. One of the ways to achieve this goal is geographic diversification. With a wise mix of stocks, you have a good chance of multiplying your returns while participating in an exciting and rapidly evolving investment avenue that offers a wide range of choices.
Cross-geographic diversification is when we start looking at different markets. While many Indian investors today know how to diversify their portfolios, even seasoned investors ignore international markets. It allows you to take advantage of different types of investments, macroeconomic policies, political environments and world market currencies. Most importantly, it limits your exposure to national stock exchanges and diversifies it across different markets, reducing the impact of volatility.
What are your global investment options?
There are three ways to start your global investments. You can choose one of these options or use a mixture. Keep geography in mind when making your decisions.
You can use digital platforms that allow you to invest directly in global markets. For easy investments, you can try apps that provide access to foreign stocks. Alternatively, you can try Indian brokerage houses, most of which now offer access to major global markets. You can also open an account with international brokers who offer services to Indian traders, such as TD Ameritrade, Interactive Brokers, and Charles Schwab.
Your direct access allows you to invest not only directly in stocks, but also in ETFs, funds active in different markets which you believe have future potential. For example, an ETF focused on battery technology, or clean energy or even China. You should note that the Reserve Bank of India (RBI) currently limits the amount of money you can send overseas to $ 250,000 per year under its Liberalized Transfer System (LRS).
Investing in index funds / ETFs:
One of the indirect ways to invest in global markets is through the use of exchange traded funds or ETFs or mutual funds that invest in foreign funds. In other words, you can invest in a mutual fund in India. This mutual fund in turn invests in one or more ETFs or index funds or securities outside of India, giving you indirect exposure to foreign markets. This is your best first bet to embark on geographic diversification.
Most asset management companies (AMCs) in India launch international funds. For example, HDFC Mutual Fund recently announced a global program to invest in funds in 23 countries. The advantage of taking the indirect route is that you don’t need to open a brokerage account to get started or a large amount.
Invest in an international fund:
International funds are equity funds owned and managed by foreign experts to invest in instruments in their home country. While there are RBI regulations you should be aware of, this can be another way to gain exposure to foreign markets while relying on experts from those countries.
Benefits of global diversification
Here are some of the top reasons why you should consider diversifying your investments.
Markets around the world operate differently at different times. Therefore, as an investor, if you have a diversified portfolio spread across different geographies, you allow your money to generate better risk-adjusted returns.
Historically, the rupee has depreciated 2-3% per year against the dollar. Therefore, any investment in the dollar (USD) may involve an increase of 2% to 3% in return only through differentiated exposure to currencies. Investing in an international asset can provide a natural hedge against the depreciation of the rupee and the volatility of the global market.
International investments offer a plethora of new opportunities. For example, if you believe in the vision of an international innovator and want exposure to their company’s actions, you can get it. Those with an appetite for differentiated investments can take advantage of geographic diversification to participate in different pockets of the market that they believe will generate more of the future value without having to be limited to what is available in India.
Things to keep in mind before investing globally
Opening a brokerage account that gives you direct access to foreign markets is currently expensive. When starting this journey, be aware of your costs per transaction, any minimum billing, etc. to ensure you calculate a cost of exposure to a fully loaded foreign market.
Gains made in another country may attract taxes in that country. You may need to file a tax return in this country. Moreover, since you are a tax resident of India, you may also need to pay taxes in India. You can claim tax credits, but there is a whole new set of taxes you need to understand before you get started. Likewise, you need to make sure that your brokerage or fund is able to provide you with the relevant reports and earnings. calculation for your need to declare your taxes.
Indians may believe that they have a better understanding of their own domestic market. However, when it comes to other countries, there may be nuances of political environments, changing regulations, disclosure requirements, macroeconomic policy, among others that we may not fully understand. in another country. Therefore, it is important to educate yourself or invest in an expert / index fund for basic exposure before seeking to take any risk specific to an asset or a security.
Most of the products available from Indian mutual funds for international exposure focus on stocks. However, it goes without saying that there are several other very important asset classes that are currently not available for Indians to invest through mutual funds. Therefore, when planning your asset allocation, remember that this exposure is part of your basket of stocks.
Global investment is slowly gaining ground in India with major AMCs promoting and offering fresh produce for this exhibition. Going forward, it is possible that a global fund will become your starting point for investing and that you slowly add different countries, asset classes etc. to steer your risk exposure in the direction you want to take. Starting point, no more than 10-20% of your equity exposure can be in foreign funds to diversify you away from risks specific to India. Once you’ve learned the ropes of investing globally, you can consider increasing your exposure.