Don’t try to actively allocate to different geographies apart from core exposure to large economies
Geographical asset allocation helps stabilize returns when domestic markets could be facing headwinds
Investment advisers have been recommending that investors must diversify their equity portfolio globally. Geographical diversification provides stability to a portfolio, gives investors a chance to take exposure to global businesses and helps in currency diversification. But investing internationally and managing the portfolio can be a complex affair. Besides feeder mutual funds, Indian brokerages have partnerships that allow investors to directly invest in stock and mutual funds abroad. Tinesh Bhasin spoke to advisers to simplify the investment process and help investors decide on asset allocation.
Use passive funds for some exposure to the US markets
Retail investors can use passive funds for some exposure to the US markets. Investing in global equities can enhance risk-adjusted returns by reducing overall risk and volatility.
Don’t try to actively allocate to different geographies apart from core exposure to large economies. Use actively-managed funds to allocate money across geographies and sectors. Some exposure can be in sectors like technology or funds focussed on innovations. Allocation would depend on investor’s risk appetite and relative valuations of the global markets. A broad range would be 5-20 % of the allocation.
Apart from feeder funds, there are a few options available. These can be accessed through the liberalized remittance scheme (LRS). A few banks and brokerage houses, which have tied up with offshore platforms, can facilitate the investors to open accounts and buy stocks, funds and ETFs directly.
Keep only 10-20% of your portfolio in global funds
Geographical asset allocation helps stabilize returns when domestic markets could be facing headwinds. It also helps in avoiding risks due to political and economic changes.
Investors must use feeder funds for this exposure. There are multiple choices available across 39 funds and ETFs, where the parent funds have underlying exposure across global markets. We suggest global equity allocation as part of strategic long-term asset allocation. There are limited options to invest in one single global fund, hence investors must spread allocation across developed markets in the US and Europe with smaller allocations to emerging markets.
We, typically, suggest 10-20% of a client’s equity assets be invested in global funds. However, if an investor has goals aligned to overseas expenditure such as children’s overseas education, one could look at a defined exposure linked to these goals.
Investors must always have some exposure to global stocks
Don’t look at geographical diversification for incremental returns. Look at investing abroad to give stability to your portfolio.
The best way for geographic diversification is to use using feeder mutual funds. A larger international exposure should be to developed markets like the US. A complementary investment could be in emerging markets. Investors should use diversified funds to take such exposures. For example, if they are investing in the US, they can look at a fund that invests in S&P 500.
Another option is to invest in global funds than taking country-specific exposure. Before investing in feeder funds, check the underlying fund in the portfolio. Of the total equity portfolio, an investor must maintain 15-20% allocation to international markets. An investor should have geographical exposure in the portfolio all the time. Also, avoid investing directly in the stocks.
If possible, investors must directly invest in global ETFs
Returns from the domestic markets have been suboptimal in the past few years. Investors can look at feeder funds to take global exposure. They can invest in a mutual fund that invests in global funds. Typically, such funds have 57-58% exposure to the US, around 30% to European countries and the rest to emerging markets.
Another option is to invest in different funds after deciding allocation to different geographies. They can keep a higher allocation (65-70%) to the US, 12-13% to emerging markets and rest to Europe. A higher allocation to the US is because the companies there are leaders in technology and innovation.
Feeder MFs can have a higher cost structure. If possible, invest directly in ETFs. This will ensure that investors don’t need to track performance of their investments. Depending on the risk appetite, you can allocate up to 15% of equity portfolio to other markets.