Why it's about time you began investing in markets outside India

Keep an investment horizon of at least five years, start with US and then go beyond that

"A butterfly can flutter its wings over a flower in China and cause a hurricane in the Caribbean," said Robert Redford's character in the 1990 movie Havana. The butterfly effect has never been so real as it is today. The Covid crisis has impacted everything, from the way we live, work and even invest. For instance, experts are saying it's time to go beyond India and explore foreign markets even for lay investors. Ajit Menon, CEO, PGIM India Mutual Fund says, "At the fundamental level, an investor is the one who buys good businesses. The Indian equity market is a $2 trillion market, while the global is approximately $87 trillion. There are many good businesses offering cutting-edge innovation in various sectors in the global markets, but they are not for those investing solely in the Indian market."

The second advantage is one of diversification among asset classes. Since the rupee feeder funds in India are investing in an underlying dollar portfolio, you are also getting exposure to currency as an asset class. Menon says, "This helps bring down volatility in the portfolio. Also, the trend so far as has been one of rupee depreciation, which adds to the returns as you are getting more rupees to the dollar." This is assuming that the rupee will remain weak.

By investing globally, we also reduce the country-specific risk. Neil Parag Parikh, Chairman and CEO, PPFAS Mutual Fund, says, "India-specific events such as demonetisation, border tension with neighbours, GST related issues, and bad monsoons will hamper the Indian portfolio. The overseas portfolio stays unaffected by such events." 
 

Indian consumption patterns go beyond India's listed space. To name a few, look at Apple and Amazon. Parikh says, "If we are such avid consumers of foreign brands, then surely they could also make for great investments."

Risks of investing in foreign equities and how to guard against them: While investing directly in overseas markets, one should keep in mind taxation, compliance, anf operations. And if you are investing directly in the US, note that there  is a 40 per cent inheritance tax. Parikh says, "The best way to guard against these is to invest in Indian mutual funds that invest part of the corpus abroad, or international funds/ETFs."

While investing in foreign funds, investors also run a currency risk. If the rupee appreciates against the currency of a foreign country whose fund you have invested in, your returns will be impacted. Counter this by investing in broadly diversified international funds.

What you should do: Gaurav Rastogi, Founder & CEO, Kuvera, says, "Investing abroad directly is cheaper except for really small amounts and also provides a wider choice of low-cost ETF in the international markets. The basics of investing apply to the international portion of your portfolio too - keep your costs low, focus on good asset allocation and rebalance periodically."

When you invest in these global funds, you should have an investment horizon of at least five years. Use the SIP route to take advantage of both currency and equity-market volatility in these funds. If you wish to invest country wise, invest in US-based funds first. Rastogi says, "The US is about 66 per cent of global equity markets. US stocks have two added advantages. They have historically had a low 34 per cent correlation with Indian stocks--so you get diversification benefit. These are priced in dollars, so they work as a currency hedge against rupee depreciation."

The right asset allocation is a specific and individual requirement based on your risk profile, and your advisor will be best suited to guide you on that. In a general sense make a meaningful allocation in your portfolio at, say, 10 per cent. Menon adds, " If you have expenses in foreign exchange because of business or your children studying abroad, you could increase your exposure to even 15 per cent or 20 per cent. Remember that this will be part of your overall recommended equity exposure too." 

Pros of global investing

. Portfolio becomes more diversified, does not depend completely on domestic market

. Access to sectors and themes not available in India

. You are able to deal better with future expenses that will arise in a foreign currency, like children's foreign education, and travel 

Cons of global investing

·       Tax treatment of international funds is at par with debt funds

·       You become subject to currency risk

·       You also become subject to geo-political risks and risks specific to the country you invest in