If the COVID pandemic has taught the world an irrefutable lesson in finance, it is that you need money. And it’s not enough if you earn it — you also need to save it such that it grows in value and remains accessible to you at any time, under any circumstance.
Mutual funds offer a viable way to do this, but here, too, you need to store the eggs across multiple baskets. A judicious split of your corpus across debt, equity and hybrid funds is important. A geographic spread of risk is also critical, say personal finance experts.
In a highly connected world, the happenings in one country certainly have an impact on other markets, but such influence tends to be limited. The economic cycle varies, and the global markets typically do not move in tandem.
Therefore, to insulate your savings from the vagaries of the Indian stock market, it may make sound financial sense to invest a select amount in international markets. Additionally, perhaps because they enjoy greater financial muscle, the markets of advanced nations usually weather crises better. So, your investment is also suitably cushioned.
Today, investing in the stock of a company listed overseas is made easy via mutual funds. Most of the top MF houses in India offer schemes that give you exposure to foreign scrips. These stocks, more often than not, are part of top indices such as the Dow Jones, Nasdaq, LSE and the Hang Seng. While some funds invest entirely in global stocks, bonds and currencies, others go for a mix of domestic and global in varying proportions.
Many such schemes are, in fact, fund-of-funds (FoF) — they invest in units of funds that invest in foreign markets. There is also an option to invest in American stocks directly by opening a US brokerage account. For first-time investors and those who are more risk-averse, investing through an Indian MF with foreign holdings might be a more viable option.
Investing in foreign markets-focused MFs not only diversifies your risk but also lets you leverage the performance of non-Indian stock markets. It is estimated that India’s GDP constitutes barely 3% of the global GDP. This means by investing in global stocks, you can tap into that 97% which is as yet out of your reach.
“International funds have been in the limelight lately due to their impressive performance over the last few years,” said Tejas GV, co-founder of Cerebral Investments & Fiduciary Services, a Bengaluru-based wealth management firm.
“These schemes have a strong case since 90% of the investment opportunities in the world are outside India. Since the Indian market has a very low correlation with some of the overseas markets, having global exposure ensures healthy diversification and gives exposure to foreign currency as an asset class,” Tejas told The Federal.
The risk around the rupee, whose weakness has for long been a pain point for the Indian investor, is also hedged by investing in foreign stocks, particularly those that are dollar-denominated.
First time out there?
If you have never invested in foreign equities and plan to start now, you first need to decide on what portion of your funds go there. This hinges on how much risk you can take. The younger you are, the more money you have at your disposal, and the fewer your immediate commitments, the more you can invest abroad. Check with a finance expert before you make a decision.
According to Tejas, who is also President of the Karnataka Association of Mutual Fund Advisors (KAMFA), the thumb rule here could be: about a tenth of the total corpus. “Investors could allocate 10-15% of their portfolios to global funds,” he observed.
Pay key attention to the fund facts. For first timers, it would be judicious to invest in sector-agnostic global funds. The sector-specific funds, such as those focused on manufacturing, real estate, IT, etc, are better suited for investors who have already put in some money in general funds, and know their way around.
However, look for funds that let you dip into sectors that are yet nascent in India. “International funds give investors several opportunities in new-age industries like e-commerce, social media, electric vehicles, cybersecurity and cloud computing, among others,” pointed out Tejas. “Amazon, Netflix, Facebook, Twitter, Louis Vuitton, Walmart and Tesla have been outperformers over the last few years. You can get exposure to these stocks.”
Even here, there are several varieties of schemes, such as global funds (domestic + foreign), international funds (only foreign), regional funds (such as Europe-only) and country funds (such as US only). Tejas advocates investing in funds that are not country-specific, especially for first-timers. This, again, is to diversify the geographic risk of your portfolio.
While some wealth advisors tell their clients to keep off emerging market stocks, some others advocate investing in those, too, though to a smaller degree.
The fund manager can make or break the performance of a fund, so pay attention to that detail, too. If you are investing in American stocks, make sure the fund manager is based there. He or she is bound to be more clued in on the market conditions there than one based in Mumbai or Delhi.
What makes global markets — particularly the advanced ones — even more attractive is the regulatory environment there. There are strict norms surrounding financial reporting, auditing and corporate practices, which means there is greater transparency for the investor.
What you should watch out for
However, it’s not all peaches and roses. Markets are prone to react to political, social and economic upheavals; this means you have to carefully keep track of global happenings.
While emerging markets such as China can give attractive returns for select periods, they can also crash without a moment’s notice. Additionally, rising geopolitical tensions can impact the markets — even those of advanced economies.
There is also the question of taxes. Depending on the period of your holding, short-term or long-term capital gains taxes are applied to your returns, per slab. You need to take this into account while calculating the investment returns.