Risks of investing in international equities: Why to invest or not invest?

By Suraj Shroff

Investments in international equity by Indian investors have surged over the last few months as investors have seen high returns from this asset class. At the same time, a lot of us have questions about should we invest in international equity, what are the risks involved, how much should we invest and how to invest? Let us look to simplify and answer these questions today.

Why not to look at International Equity?

Firstly let us highlight the reasons not to look at international equity or the risks in international equity investing. The main reason for the sudden popularity of international stocks is due to high returns over the last few quarters & the news about how companies like Amazon, Apple, Tesla, Netflix and others have grown during the pandemic. This is an absolutely the wrong reason to look at international equity as past returns will not benefit future investors. Currently Indian stock brokers and mutual funds are promoting International Equity offerings as well, selling based on past performance. Investing after seeing high returns generally leads to disappointment. Additionally international equities also face risks associated with equity investing including political,economic & fiscal risks which is currently being ignored. US elections in the near term will add volatility to global markets. Foreign exchange fluctuations can be a risk in the short term.

Why International Equity?

After highlighting some of the risks, let us now look at why should international equity be a part of an individual's portfolio. International equity is a great way to get exposure to companies and sectors which are not available in the Indian markets. E-commerce, search engines, payment infrastructure, cloud computing, electric mobility, enterprise software, digital OTT platforms are some of the sectors which are showing good growth globally but we don't have listed companies in India. Exposure to international equity also provides us a hedge against the depreciating rupee, which can also add to returns in the long term. It also helps us to diversify our portfolio outside our home country, which will prove helpful in the long run.

How much to invest in international stocks?

There is no standard reply to this question as every individual's portfolio and requirements are very different. But, we would recommend a 10-15% exposure to international equity in a long term portfolio.This exposure should be built in a staggered manner through periodic investments. People expecting Dollar related expenses like children's education could possibly allocate slightly higher as well. Please do not go overboard currently due to the recent returns as they will normalize in the years to come.

How to invest?

Investing through a global fund or by buying US stocks directly are options for taking exposure. A well diversified global fund is a great option for people looking to start investing and diversifying their portfolios. Other options include country specific funds, region specific or thematic funds like US Technology, etc. While buying an Apple or Amazon or Tesla stock looks more exciting, over a period of time, unless you have the time and expertise to track and monitor various global factors, it makes sense to go the fund route for retail investors. Liberalized Remittance Scheme clearance, US Tax laws & International asset declaration in IT returns would be other points to be kept in mind to decide whether to look at global funds or direct international equity transactions.

Asset allocation and portfolio diversification should be the reason to look at international equity and not recent returns...happy investing.!!

(The author is the founder of Infiniti Investments, a Bangalore based end to end financial planning and investment advisory firm. Views as expressed by the author.)