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Points to know before investing in global funds

Allocate 10-15% of your overall portfolio to global options. Within that, allocate about 65-70% to developed markets and about 30-35% to emerging markets   (Ramesh Pathania/Mint)Premium
Allocate 10-15% of your overall portfolio to global options. Within that, allocate about 65-70% to developed markets and about 30-35% to emerging markets (Ramesh Pathania/Mint)

  • While the bluechip and tech companies of the US are the first options that come to our mind, that may not necessarily be the most appropriate strategy if the right amount of research and study is not done before investing in them

How do I go about investing in Global Funds? I am a 32-year-old individual investing in the stock markets for the last 5 years. With various opportunities available in the US markets and other countries, I want to invest a portion of my corpus and future income in the options available in those countries. What should I keep in mind while investing globally?

-Name withheld on request

To start with, you must look to invest at least 10-15% of your portfolio in well-performing global funds with the right combination of developed and emerging market allocation.

While investing globally is always an exciting prospect, there are certain fundamental rules that an investor can follow to make their global investing journey fruitful and avoid pitfalls. While the bluechip and tech companies of the US are the first options that come to our mind, that may not necessarily be the most appropriate strategy if the right amount of research and study is not done before investing in them.

An emerging versus a developed market approach can be an appropriate way to look at global investments. We can implement this allocation by determining appropriate weights based on each market's contribution to the world GDP.

For example, the US (developed market) contributes about 40 % to the world GDP while Asia Pacific (ex-India) contributes about 30% to the world GDP. Europe has almost a 17-20% contribution to the world GDP.

So, to get an appropriate global allocation that is well-diversified, risk-adjusted and has a low correlation with each other, we could look at investing in the above ratio. The following thumb rule could be followed:

Allocate 10-15% of your overall portfolio to global options.

Within that, allocate about 65-70% to developed markets in good index/active funds, which mimic the performance of S&P 500 and/or NASDAQ and about 30-35% to emerging markets (ex-India).

Another benefit of global investing is a hedge against rupee depreciation, which has been prevalent at 4% annually. Thus, a client's financial goals linked to global aspirations such as foreign vacations and children's education are getting a proxy hedge through investing in the fast-growing global markets.

Tarun Birani, Founder and CEO TBNG Capital Advisors. Queries and views at mintmoney@livemint.com

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