A guide to diversifying your portfolio by investing in international markets and assets.
Tuesday, Jul 30, 2024
Have you noticed something interesting lately? There's been a lot of talk against China in economic discussions. But when you look at what's actually happening with startup investments and foreign money coming into Indian businesses, it tells a different story.
It's like we're seeing two completely different pictures.
Now, step back for a moment and look at the bigger picture. Even though countries are butting heads politically all over the world, we're not seeing less trade between countries. Money is still moving around the globe, and so are people.
This tells us something important: “Globalization isn't just about big companies trying to expand. It's a key part of how entire countries grow their economies.”
Let’s see how to tap into international markets in your portfolio with this article. Although, portfolio management services can in fact facilitate the process of diversifying your portfolio with international assets.
Global markets through India’s lens
First off, India's economy has been growing like crazy. This has caught the eye of investors from all over the world. The government's been making some smart moves too, changing rules to make it easier for businesses to thrive.
India's also been making friends in the business world. It's shaking hands with countries like the US, Japan, and Australia, which means more buying and selling across borders.
Moreover, foreign money is pouring into India like never before. Tech companies, medicine makers, and factories are all on the rise due to this and these investments are quickly going to translate into value.
If you’re wondering how you should perceive all these developments as an investor, that is indeed a wise question.
For the retail investor, this means that the Nifty 50 or BSE Sensex hitting record highs every now and then is not merely speculation—it shows that people globally believe in India’s potential, which validates that primary notion that the Indian economy is on the rise. Not only you and I, but the entire world is closely monitoring the Indian growth trajectory.
Legal frameworks for international investing
If you are a cautious person, it is natural to wonder if such things are even legal. You might be stuck with the notion that only rich businessmen can deal with cross-border financial operations and have the assumption that you need an army of accountants and finance experts to navigate international investing and legal processes.
But that isn’t really the case. At least, not anymore!
The government has really made it easy to make investments internationally. There’s the Liberalized Remittance Scheme (LRS). This is your golden ticket to international investing. It allows you to send up to $250,000 abroad each financial year without jumping through hoops for approval from the Reserve Bank of India. That's a pretty hefty sum to play with in the global markets!
So, where’s the rulebook? ‘FEMA’—that's the Foreign Exchange Management Act—which is the referee that oversees all foreign transactions. When you are moving money in and out of India, it’s important to comply with these laws.
Is that all? Of course not!
Double Taxation Avoidance Agreements (DTAA): These agreements make sure that you are not paying taxes twice on your international gains.
Overseas Direct Investment (ODI): For the inherently curious and fearless investors among us; ODI opens doors to setting up joint ventures or wholly-owned subsidiaries abroad.
International mutual funds and ETFs: Not ready to go solo on your international financial investment journey? No problem. SEBI-regulated international mutual funds and ETFs offer a taste of global markets without making you uncomfortable or sending chills down your spine.
With the current access that we Indians have to FinTech systems, making international investments is as easy as ordering food online!
Your quick guide for investing in international markets and assets
Let’s look at all the asset classes there are in the international markets.
Foreign asset classes:International Equities
International equities represent ownership in companies listed on foreign exchanges. From established multinationals like Apple, and Tesla in developed markets to high-growth firms in emerging economies, you get to access them all. Investors gain exposure to diverse economic cycles, industry specializations, and currency movements. It’s also important to note that they come with a requirement for you to be highly informed, not only in terms of finances but also economic relations between countries.
Sovereign and Corporate Bonds
Foreign fixed-income securities like sovereign bonds are issued by national governments and are generally considered lower risk but are subject to country-specific economic and political factors. Corporate bonds, however—while potentially offering higher yields—require careful credit analysis. Both types provide portfolio diversification and can act as a hedge against domestic economic downturns.
Exchange-Traded Funds (ETFs):
These are cost-effective ways to gain international exposure. They track indices representing specific countries, regions, or sectors. ETFs also provide intraday liquidity and have gained popularity for their transparency and lower expense ratios compared to other actively managed funds.
Real Estate Investment Trusts (REITs)
International REITs allow participation in global property markets without direct ownership. Although they offer higher dividend yields than equities and provide a hedge against inflation, it is critical to understand that they are sensitive to interest rate changes and local property market conditions.
Commodities
Investment in global commodities, from precious metals to agricultural products, serves as an inflation hedge and a portfolio diversifier. Commodities don’t have stiff correlation with the equity and bond markets and move independently. But they are influenced by global supply-demand dynamics and geopolitical events.
Foreign Exchange (Forex)
Direct currency investment or forex trading offers the opportunities to profit from global economic shifts and interest rate differentials. But it requires a deep understanding of macroeconomic factors and is quite risky due to the high volatility and leverage often employed in this market.
Derivatives
Futures, options, and swaps on foreign assets give you tools for hedging and taking up speculative positions. These instruments provide leverage and can be used to gain exposure to foreign markets with limited capital—on the contrary, they also carry heightened risk and complexity.
GreenPortfolio is the best PMS in India that you can go to get your investments right!
The risk-reward equation
Potential rewards:
Enhanced returns: International markets in emerging economies offer higher growth rates than mature markets. For instance, while India's GDP growth has been great, countries like Vietnam or Indonesia have traced even higher growth potential in specific sectors where the Indian economy is shaky.
Diversification benefits: By spreading your investments across different countries, you're not putting all your eggs in one basket. This geographical diversification reduces your portfolio's overall volatility. When the Indian market hits the lower circuit due to national issues, your international investments might just be hitting their stride as they possess their own being and behavior.
Currency gains: If you invest in a country whose currency appreciates against the Indian Rupee, you will see that appreciation in the form of additional return! Say you invested in US stocks and the dollar strengthens against the rupee—your returns in rupee terms will be higher than the actual stock performance.
Access to global leaders: International investing opens doors to owning pieces of global giant corporations like Apple, Amazon, or Samsung, which aren't listed on Indian exchanges.
Potential risks:
Currency risk: The flip side of potential currency gains is the risk of currency depreciation. If the rupee strengthens against the currency you've invested in, your returns could take a hit even if the underlying asset performs well.
Geopolitical and economic risks: Each country comes with its own set of political and economic challenges. Brexit in the UK or trade tensions between the US and China are examples of how geopolitical events impact investments.
Information asymmetry: You might not have the same level of information or understanding about foreign markets as you do about the Indian market. This information gap can often lead to misjudged investment decisions.
Regulatory and tax complexities: Different countries have different tax treaties with India. You might face withholding taxes on dividends or capital gains that vary from country to country. Regulatory changes in foreign markets also impact your investments in ways you might not have anticipated.
Liquidity risk: Depending on the market and asset class, it might sometimes be challenging to quickly convert your investments back to cash without incurring significant losses.
The balancing act:
Asset allocation: Start by allocating a small portion of your portfolio to international investments. Financial experts often suggest beginning with 10-20% of your equity allocation, depending on your risk tolerance and investment goals.
Diversification within international investments: Don't put all your international eggs in one country's basket. Spread your investments across different countries and regions to balance out country-specific risks.
Risk measurement: Use metrics like Sharpe Ratio or Sortino Ratio to measure risk-adjusted returns. These will help you understand if the additional risk of international investing is being adequately compensated by returns in actuality.
Regular rebalancing: As international markets move, your allocation might get skewed. Regular rebalancing (say, annually) helps you maintain your desired risk level.
Currency hedging: Using currency hedging strategies might be critical to mitigating the impact of currency fluctuations on your investments.
Does it truly aid in Risk-Adjusted returns?
The million-rupee question: Is international investing worth it? Here's what you need to know:
Correlation Benefits: International markets often move differently from the Indian market, potentially smoothing out your overall portfolio performance.
Long-term Growth: Exposure to global leaders in technology, healthcare, and other sectors can boost long-term returns.
Currency Diversification: Investing in foreign assets can act as a hedge against rupee depreciation.
However, it's crucial to consider:
Transaction Costs: International investing may involve higher fees and currency conversion costs.
Tax Implications: Understand how foreign investments are taxed in India to avoid surprises.
Worried about getting it right? Portfolio management services can handle the nuances of investment for you.
Charting your own path
Are you ready to take the plunge? Here's how to get started:
a) Assess your goals: What do you want to achieve with international investing? Growth? Income? Diversification?
b) Determine your risk tolerance: How much volatility can you handle? This will guide your asset allocation.
c) Choose your investment route:
Direct international investing through LRS
International mutual funds or ETFs, based in India
Domestic companies with significant international exposure
d) Start small: Begin with a small portion of your portfolio (say 5-10%) in international assets.
e) Stay informed: Keep track of global economic trends and geopolitical events that might impact your investments.
f) Rebalance regularly: Review and adjust your international allocation periodically to maintain your desired risk level.
g) Seek professional advice: Consider consulting with a financial advisor experienced in international investing. They can help tailor a strategy to your specific needs and goals.
Information negligence implies catastrophe
The interconnected nature of today's markets means that events on one side of the world can have profound impacts on investments half a globe away. A policy change in the United States, a natural disaster in Southeast Asia, or a technological breakthrough in Europe can send ripples—or waves—through your carefully constructed portfolio!
Consider the following:
1. Geopolitical awareness: Political tensions, trade disputes, and regulatory changes alter how your investments behave. Staying on top of global affairs is not just prudent—it's necessary for protecting your investments.
2. Economic indicators: Understanding and interpreting economic data from different countries is essential. GDP growth rates, inflation figures, and employment statistics, all these numbers have their own role in shaping market movements.
3. Currency fluctuations: For the international investor, currency movements critically impact returns. Neglecting to monitor exchange rates and central bank policies leads to unexpected losses.
4. Sector-specific knowledge: Different industries dominate in different parts of the world. Be informed about sector trends globally to uncover opportunities and avoid pitfalls.
5. Regulatory compliance: International investing comes with a complex web of regulations. Stay informed about the legal requirements, as even unintentional non-compliance leads to penalties or, worse, investment restrictions.
The consequences of information negligence can be severe. At best, it might mean missed opportunities; at worst, it translates to financial losses or legal complications. There's simply no excuse for remaining uninformed.
How can you systematically stay informed?
- Regular reading of reputable financial publications
- Following expert analyses and market reports
- Utilizing tools and platforms that aggregate global financial data
- Engaging with financial advisors who specialize in international markets
- Participating in investor education programs focused on global investing
Are you stuck somewhere?
Remember, successful international investing is not just about diversifying your portfolio—diversifying your knowledge base plays an equally relevant role.
If international finance is a game of chess—the informed investor is always several moves ahead.
Let us take this part from you and we’ll help you create the best portfolio with everything you want in it. We are GreenPortolfio, which is one of the best PMSs in India. We’ve been doing this for a couple of clients and we’ll do it for you as well.
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