Simplified regulatory norms and disruptive FinTech platforms make this a favourable time for the upwardly mobile investor to seek diversification towards international mutual funds and stocks to generate good returns on investments. Most lay investors can start investing via feeder funds or mutual funds offered by Indian mutual fund companies. You also have the option of investing in direct stocks if you have the inclination for it.
Here are four reasons why every strong portfolio needs exposure to international funds.
1. Portfolio diversification
The volatility and uncertainty we have witnessed over the last year brings to the fore the need to diversify our investment portfolio across asset classes. Exploring opportunities beyond geographical boundaries makes for an equally compelling case. All countries have varying economic cycles, and having a small part of your portfolio outside India can help mitigate country specific risk and supplement portfolio yield when the domestic market is on a downturn.
While some experts recommend the average investor to take portfolio exposure of 5%-10% towards international investments, others think active investors with a good pulse of domestic and global markets can go as high as 10%-15%.
Of course, a consideration towards international avenues should only be made once you have a substantially diversified portfolio in India across different asset classes such as term deposits, PPF, stocks, mutual funds, real estate, gold, etc.
2. Opportunity for superior returns
The G-8 economies house some globally disruptive companies that make for lucrative investing – such as Amazon, Apple, Facebook, Google, Tesla, etc. in the USA or SAP, AstraZeneca, Novartis, GSK, HSBC and so on in the UK. Not only are these businesses household names in India, they are also fundamentally strong, blue-chip giants that have consistently delivered superior returns to investors.
Alternatively, countries such as Croatia, Denmark, Thailand, Bangladesh, Indonesia and Malaysia, etc. are consistently growing economies, which is an indicator of growing output and increased profitability. This in turn boosts consumption demand, infrastructure development and real estate prices. The equity markets too reflect corporate performance and vice versa. There is a tremendous opportunity to capitalise on the long-term growth potential of such emerging economies, which can help you generate additional returns over the benchmark from other larger growing economies such as China or Brazil.
3. Currency exchange advantage
Those looking for investment opportunities in countries where the currency is stronger than India, can also benefit from potential exchange rate disparity in addition to stock appreciation. In 2020 alone, the INR depreciated by 2.83% against the US$, which translates into a corresponding gain in a US-centric international fund, or simply put more Rupee gain for every Dollar invested.
It should be noted that based on the prevalent exchange rate and foreign currency mark-up charged by the intermediary, you would lose about 3% of the fund value on both sending and repatriating your funds. Hence, the potential for currency gain is only possible for long-term investments.
4. Goal-specific investments
Many families plan to send their children abroad for higher education or build assets in a foreign country to retire with a better standard of living. Therefore, it makes sense to consider region specific investments aligned with your long-term goals. In addition to capital appreciation, the investments also help you build a currency bucket and provide a hedge against exchange rate volatility for when you need to liquidate the investment.
A systematic investment plan (SIP) in a region/country specific fund is a great way to start working towards such long-term goals while simultaneously looking for opportunities during troughs to make lump sum investments, if you have the investible surplus.
Factors to consider
Fund selection: A multitude of funds are available that invest across different regions and sectors. Investors should select funds after considering their investment goals, timelines and risk tolerance. In addition to the currency volatility, changes in economic and political climate can have a significant impact on your international portfolio.
Those with a higher risk appetite can consider mutual funds or ETFs that invest across asset classes from emerging economies, such as stocks, real estate, debt, technology, and more. A financial advisor can help identify many active and passive funds with varying market exposure across the risk spectrum.
Investment and taxation: Under the Liberalised Remittance Scheme (LRS), Indians can remit up to $250,000 per annum for any current and/or capital account transactions. There is no restriction on the type of investment – stocks, mutual funds, bonds, real estate, etc. However, capital gains on foreign investment are treated as fixed income for income tax purposes.
Investments redeemed within three years will be considered as short-term capital gains and taxed at your existing tax slab. Subsequently, long-term gains are taxed at 20%, subject to inflation indexation benefits.
It is important to ensure that you follow a clear asset allocation on international investing options. Make an assessment of your future need states that might emerge in forex and plan for that estimated value. For most people, having 5-15% allocation to international investment options will suffice.
The opportunities and risk associated with investing abroad are no different than our own country. However, you need to exercise caution and conduct adequate due diligence to understand the political, economic and financial climate of the country/ region you are looking to invest in. Understand the objective and track record of the fund, and analyse if it is in sync with your investment strategy.
(The writer Prateek Mehta is Co-Founder and CBO, Scripbox. Views are his own)