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
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