Go global to limit India-specific shocks, hedge currency risk

Limit global allocation to 10-15% initially, avoid chasing recent outperforming countries and themes

Vested Finance has enabled Indian retail investors to invest directly in global mutual funds, with minimum investments starting at $10. These transactions are routed through the Reserve Bank of India’s Liberalised Remittance Scheme (LRS), which permits remittances of up to $250,000 per financial year. The platform offers access to international mutual funds across more than 50 countries. Other platforms, such as iFAST and Crysta,l also facilitate investment in offshore mutual funds.

 

Access 96% of global market cap

 

Global diversification mitigates concentration risk linked to the Indian economy. “India is only about 4 per cent of global equity market cap, which means that over 95 per cent of opportunities lie outside India,” says Viram Shah, founder & chief executive officer (CEO), Vested Finance. Investing abroad provides exposure to sectors unavailable in India, including global technology, luxury brands, pharmaceuticals, and green energy.

 

Diversification also protects investors during shocks that may hit the Indian market disproportionately. “A diversified global portfolio reduces the impact on the portfolio when India is disproportionately affected, say, by an event like the tariff shock,” says Vishal Dhawan, founder & CEO, Plan Ahead Wealth Advisors.

 

Currency risk is another factor. “The rupee tends to depreciate at the historical average of 3–4 per cent against the US dollar. When such depreciation happens, returns on global assets may increase in value in rupee terms,” says Shah. Investors with foreign currency goals—such as overseas education or travel—can thus hedge currency risk. 

 

Access to wide variety of countries, themes

 

The LRS route offers investors access to a range of countries and funds. Vested, for instance, provides access to more than 50 funds across the US, Europe, Japan and emerging markets, with a minimum investment of $10.

 

This route also enables investors to circumvent the overseas investment limits that constrain several global fund-of-funds offered by Indian mutual funds.

 

“Retail investors with small portfolios may not be able to achieve adequate diversification if they buy international stocks directly. They may also lack the research capability to decide which international stocks to buy or sell, hence mutual funds or ETFs are beneficial,” says Dhawan.

 

Building the global portfolio

 

Most investors can start by allocating 10–15 per cent of their equity portfolio to global assets. “Investors with international liabilities or those wanting deeper global exposure can raise allocation to 20–25 per cent,” says Shah.

 

So far, the bulk of investments by Indian retail investors has gone into the US market. The US is the world’s largest equity market and is a key innovation hub. However, overreliance on it can subject the portfolio to US-specific risks. 

 

Other markets also present strong opportunities. “Europe offers strong dividend-paying industrial companies and luxury brands. Taiwan, South Korea and Brazil offer exposure to semiconductors, consumer and commodity stocks,” says Shah.

 

“Many large pharma businesses are listed in Europe. China is another opportunity. Investors may also consider a broad emerging market fund (that excludes India),” says Dhawan.

 

Most retail investors would benefit from setting target allocations for countries and rebalancing periodically. “This would be a safer approach rather than attempting frequent tactical shifts based on market outlook,” says Abhishek Kumar, Sebi-registered investment adviser and founder, SahajMoney.com.

 

Some experts favour the tactical approach. “Countries like Japan, China and even the United States have witnessed long phases during which their markets underperformed the Nifty. Well-informed investors should change the allocation based on the outlook for each country,” says Shweta Rajani, head – mutual funds, Anand Rathi Wealth.

 

Investors should also diversify their global portfolios across asset classes like equities, bonds, real estate investment trusts, and commodities.  “Investors may consider opportunities in areas like artificial intelligence, semiconductors and renewable energy,” says Kumar.

 

When investing in themes, investors need to assess their sustainability.. “Global themes go through cycles, and timing the entry and exit may be difficult,” says Rajani.

 

Points to heed

 

Tracking global markets is demanding. “Each country operates under different economic, political and regulatory conditions that may not be easy for retail investors to fully understand,” says Rajani.

 

Currency transfer, conversion and transaction-related charges apply while entering and exiting foreign funds. These costs can prove significant for small-ticket investors.

 

Furthermore, the recent outperformance of global markets should not drive investment decisions. “Investors should not fall prey to recency bias and go overboard on foreign funds, as such outperformance may not sustain over the long term,” says Dhawan. Kumar also warns against relying solely on past performance, concentrating on a single sector or theme, and creating portfolio overlap across funds.

 

Tax reporting for foreign assets is more complex than for domestic funds. Investors going for this route must ensure that their tax reporting is accurate. “Retail investors utilising the LRS route to invest in foreign mutual funds must ensure that such overseas investments are properly disclosed under the prescribed foreign asset reporting schedules in the income-tax return, in line with Section 139(1) read with Schedule FA. Capital gains must be reported under Schedule CG. If tax has been deducted at source on capital gains, such tax may be eligible for credit in India under the double taxation avoidance agreement (DTAA),” says Suresh Surana, a Mumbai-based chartered accountant.