Investors should diversify portfolio across countries

Investors should diversify portfolios beyond the US
Investors should diversify portfolios beyond the US


  • Ideally, your global portfolio should also have investments in top EMs, Europe, Japan
  • A good way to reduce risk can be investing globally from the point of view of the size of gross domestic product

The US stock markets today are the mainstay in most of the global portfolios of Indian investors. The key reason is the stellar performance of some of the US-listed stocks such as FAANG (Facebook, Amazon, Apple, Netflix and Google) over the past 10 years. This prompted some of the evolved Indian investors to look at opportunities outside of the country with an aim to diversify their portfolios.

Resident Indians are allowed to remit up to $250,000 per financial year under the liberalized remittance scheme of the RBI.

“The US is the most dynamic market in the world. The kind of ideas that can come out of that geography and the R&D that happens there has no match. If you have already done diversification in India, the next logical decision is global diversification, and the first county that comes to mind is the US," said D.P. Singh, chief business officer at SBI Mutual Fund, which recently launched its first international fund investing in US stocks.

Among a growing trend, resident Indians who have been betting on the US markets have slowly but on a small scale are trying to diversify out of the US. We tell you whether you should invest in geographies outside of the US.

Resident Indians are allowed to remit up to $250,000 per financial year under the liberalized remittance scheme of the RBI.
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Resident Indians are allowed to remit up to $250,000 per financial year under the liberalized remittance scheme of the RBI.

In the past decade, the US markets have broadly outperformed Indian markets and the benefits of geographical diversification (consequently currency diversification) have come to the fore and Indian investors and advisers are treating foreign equities as an important component of asset allocation.

“Today, the problem is that most of the Indian investors are diversifying within India and that any diversified portfolio of any mutual fund house is putting money in the same kind of stocks. We are hopeful that the US will be able to deliver much better return than any other geography in the world," said Vinay Tonse, MD & CEO of SBI MF.

Experts say that the US markets remain largely untouched by Indians. “Investors are still discovering the US markets itself. There are about 3,500 US securities, but only about the top 200 or so are being invested in by Indian investors," said Swastik Nigam, founder and CEO of Winvesta, a fintech firm that allows Indians to invest abroad.

According to experts, 40-45% sales of S&P 500 companies come from operations outside of the US, meaning investors indirectly play on the global GDP growth through these companies.

However, there is a general expectation that the US market is in bubble territory and overheated. Moreover, there are certain developed markets as well as some of the emerging markets (EMs) that are trading at a discount to the US.

“Other markets have also rallied, but the US market seems to be in the highest bubble territory. People are thinking that if they are diversifying outside, there is a need to diversify to other markets to reduce the correlation," said Nigam.

There are a large number of exchange-traded funds (ETFs) that are listed in the US that track global indices such as the UK’s FTSE 100, Germany’s DAX 30 and Japan’s Nikkei. This way, you can have exposure to other countries without having to open brokerage accounts for specific geographies. Some Indians are also looking at emerging economies such as Mexico and Brazil, among others.

Some of Winvesta’s clients are also betting on thematic ETFs that track global clean energy and financial technology firms.

Thematic investment has recently picked up in India with some of the asset management companies launching such funds.

Recently, HSBC Asset Management (India) launched Global Equity Climate Change Fund of Fund, an open-ended scheme investing in HSBC Global Investment Funds - Global Equity Climate Change. This fund will invest in an underlying fund, which has a thematic focus on climate change.

But thematic funds carry very high risk and only experienced investors should dabble in them.

A good way to reduce risk can be investing globally from the point of the size of GDP. If the US is around 60% of global GDP, then you can allocate the same amount of share to the US markets in your overall global portfolio with 20% each in EMs and other developed markets.

The general concept of global diversification involves three key themes. First is the US, which captures 55-60% of the global GDP, second is EMs and the third is developed markets, which is a combination of Europe and Japan.

“By combining these three themes, you are essentially looking at a portfolio that is diversified across all geographies," said Pratik Oswal, head, passive funds, Motilal Oswal AMC, which is planning to launch two funds focused on EMs and developed markets.

Financial planners also advise that just like the portfolio diversification in India, investors must also look to diversify their global investments.

“Every country has its own specialty. The US is a good market, but any economy-related issue will have an impact on its stock market. It makes sense to have a diversified allocation in global portfolio as well, including some of the top emerging markets," said Nishith Baldevdas, founder of Shree Financial and a Sebi-registered investment adviser.

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