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Business News/ Money / Personal Finance/  Should your investment portfolio be ‘Made in India’ only?
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Should your investment portfolio be ‘Made in India’ only?

The need to run a diversified portfolio continues to be relevant for many investors

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Indian equity markets have been among the best performers over the last one year. Many investors who began to diversify their portfolios relatively recently have not had a great start to their international diversification strategy.

So, how has a ‘Made in India’ portfolio performed? While Indian equity markets have been only marginally negative over the last one year in rupee terms, other geographies are down between 7% and 30% over the same period. However, as the investment horizon becomes longer, many markets start to perform better than Indian markets (see chart). The picture is not very different when you look at all the market returns in dollar terms. In spite of the dollar strengthening against the rupee, Indian indices have outperformed the global indices by 5% to 25%, depending on which international market you look at (see chart). However, once again, as you expand your holding period, you will notice that the return dispersion between these different geographies start to reduce, with certain geographies starting to outperform India.

The relatively more stable macro environment in India, as well as support from domestic investors, has made investors far more confident about Indian equities vis-a-vis other global geographies. In addition, a natural home bias and familiarity bias to investors to their home country have meant that the comfort with India is inherently very high in any case for domestic investors.

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While we are prone to a recency bias, which makes us believe that the outperformance of India in the more recent past can be extrapolated to the future as well, it is crucial to note that equity market valuations are a very important factor when making forward-looking decisions. While most global market forward Price to Earnings multiples are in line or at a discount to long-term averages, Indian multiples are at a 26% premium to their long-term averages. This is not very different from how US market premiums were at the end of 2021, and thus investors need to be careful basing their investment decisions purely on the macro environment.

Investors also need to note that their multiple goals, including international travel and education for children, may end up happening in foreign currency and while the rupee has done well against most global currencies in 2022, its weakness against the dollar has meant that investors spending for these goals in dollars have had to shell out a significantly larger amount than what they would have anticipated. Thus, the need to run a diversified portfolio continues to be relevant for many investors.

In much the same way as rebalancing portfolios is important between equity and debt, it is crucial to have rebalancing happen between domestic equities and international equities as well, when one portion of the portfolio does substantially better than the other. Since Indian equities have done much better than global equities over the last 12 months, there will be a need to pare down some Indian equity exposure and add global equities instead. As difficult as it may be to rebalance when you read the commentary globally, an “India plus one country" strategy, at the very least, is crucial for a robust portfolio.

Vishal Dhawan is a certified financial planner, and founder of Plan Ahead Wealth Advisors, a Sebi-registered investment advisory firm.

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Published: 02 Nov 2022, 11:06 PM IST
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