It has been calculated that on an average, any two people on Facebook are separated by 3.57 ‘degrees of separation’. The world is increasingly getting closer particularly because of the way that technology is connecting people and breaking boundaries. This means that people are no longer restricted to their geographical boundaries when it comes to travelling, purchasing products or even investing. International investing can give a good flavour of diversification to Indian investors and help them hedge some of their India exposure.
There are two main benefits of international investing.
Diversification – The importance of diversification is well known. A well-diversified portfolio spreads the portfolio investments across multiple asset classes such that the overall portfolio risk is minimised. The key to optimal diversification is to invest in assets that have low to negative correlation with each other. In that regard, international investment assets can act as a good diversifier for a domestic portfolio.
New opportunities – There is no paucity of investment opportunities in India. Across asset classes and investment strategies, investors have multiple options to choose from and invest. Having said that, there are always certain investment opportunities or themes that might not be available in India. For example, an investor might want to capitalise on the tech boom by investing in the FAANG (Facebook, Amazon, Apple, Netflix, Google) stocks.
Risks in international investing
When making any investment decision, it is important to weigh the return potential with the risks. International investing can carry several risks that investors must pay attention to. These include:
Currency risk – The exchange rates between two countries can sometimes be highly volatile and can have a sharp impact on the returns realised. For example, as an Indian investor investing in the US, your investment might make a return of 10%. However, if the USD depreciated against the INR by 4%, then your rate of return would drop to 6%.
Geopolitical risk – When investing abroad, it is important to invest in countries that are politically stable and have a robust governance and legal framework. This will impact the investment climate of the country, the liquidity in the markets and the ease with which the markets can be accessed.
Regulatory risk – Investing abroad requires individuals to abide by the rules of their home country as well as the rules of the foreign country. Sometimes, flouting these rules, either intentionally or unintentionally, can lead to high penalties. Thus, investors need to ensure that they abide by all the necessary rules and regulations and are agile enough to respond to any changes in them.
Investing overseas
Indian investors can invest overseas through domestic mutual funds that have dedicated international schemes, fund of funds (FoFs) or directly (equities). If an investor is investing in direct equities, then he/she must remember that resident Indians are only allowed to remit an aggregate sum of USD 250,000 per financial year under the Liberalised Remittance Scheme (LRS) of the RBI. However, when it comes to investing via funds, there is no such applicable limit since the investor is not remitting any money outside the country. International investing also has tax implications that an investor must consider. Given the risks involved and the regulatory requirements, it is not easy for an individual investor to invest overseas. However, such investments can potentially enhance the risk-adjusted returns of a domestic portfolio. In such a scenario, it is always best to consult your financial advisor who can not only advice you on your portfolio decisions but also provide the relevant information about international opportunities and ensure that you are compliant with both domestic as well as international rules and regulations.
