Like most Indians, I am deeply invested in India - my family, work, savings, and wealth are all rooted in the Indian economy. While I believe that, despite short-term volatility, India will continue to offer opportunities to generate significant wealth, it may be prudent to consider the high concentration risk of having all our eggs in one basket. Investing in global markets with low correlation to the Indian economy and markets is one way to the diversify the geographic concentration that resides in most Indian portfolios.
For investors, the impact of Covid-19 on the real economy and financial system highlighted the limitations of existing forecasting models which could not deal with non-linear, complex, systemic risks. Looking at environmental, social, and governance risks alongside financial metrics parameters could make us better prepared in the future for unforeseen risks, such as those we have experienced during the pandemic, and emerging risks like climate change. This is one of the main reasons why integrating ESG into our investment decision-making processes today is so important, and why asset managers controlling over $80 trillion of funds now subscribe to the ESG-focused United Nations Principles for Responsible Investment (UN PRI).
Resident Indians can undertake global investments by investing in rupee denominated international mutual funds or via the Liberalised Remittance Scheme (LRS), first introduced by the Reserve Bank of India in 2004. In the case of rupee denominated international mutual funds the purchase of units is made in rupees and the scheme allows you to gain exposure to foreign markets without the need of a foreign brokerage account and additional reporting. The LRS allows an individual including minors to remit up to USD 250,000 in a given financial year for all their capital and current account transactions. Both options are a good way to create a hedge against a depreciating currency and diversify a financial portfolio. However, the LRS route has a few advantages that can additionally help meet specific goals including travel, lifestyle, and education, in addition to financial investments. Managed effectively, LRS can facilitate the accumulation of a sizeable foreign currency reserve to meet future planned expenses such as education or immigration, as well as to provide a contingency for those unplanned requirements such as healthcare. While investors have the option to make foreign investments under LRS directly from their onshore bank account, in most circumstances, the preferred option would be to open a foreign currency account with an offshore bank from which these foreign investments can be made, so that funds on redemption need not come back to India and a high quality diversified portfolio can be built over time. Moreover, proceeds from the redemption of an LRS investment made through an onshore rupee account would flow back to the same account, thereby precluding the accumulation of foreign currency offshore to meet and would necessitate repeated exposure to rupee fluctuations from re-investments.
Before embarking on your global investment journey consider formulating an investment strategy and asset allocation plan that focuses on building a well-diversified core portfolio keeping in mind the risk tolerance. Broad-based diversified holdings across geographies, sectors, asset classes and currencies can help achieve long-term stable returns and can also help weather large market swings in any one region, thereby reducing volatility and improving the overall profile of the investment portfolio. Over the past 10 years no market has consistently outperformed year after year; the US was the top performing market for four years, China for two years, and Japan, Germany and India for one year each1. Additionally, exposure to global currencies of strong economies creates a natural hedge and allows one to maintain purchasing power and protect against the rupee which has historically depreciated about 3% on average over the last 15 years. Over time as you gain in knowledge and confidence, you can consider adding more strategies against identified pools of risk capital.
In addition to direct equity investments in favoured stocks, investors have choices across an entire spectrum of strategies and investment products ranging from broad-based funds such as passive index funds to more active, focussed, and thematic funds. Private portfolio services and alternative funds such as private equity can be considered for larger corpuses accumulated over time. The choice of investment vehicle should almost always depend on the investment objective. If you are not an active investor yourself, consider working with unbiased advisors that can assist in crafting a portfolio that takes into consideration different asset classes, geographies, sectors, market capitalizations, currencies; and can subsequently monitor and manage these exposures based on global market fundamentals and macroeconomic factors.
At the time of investment selection, understand the fee structures, compliance requirements and the tax regulation for different types of securities and asset classes. For example, while the tax rates may be same, the holding period for short term capital gains tax and long term capital gains differs for direct equities, funds and real estate. Further, moving in and out of investments can make reporting cumbersome and generate sub-optimal returns net of fees and taxes. Therefore, working with trusted advisors that have an understanding of the regulatory landscape and the experience and expertise to both formulate an investment strategy and assist in seamless execution is beneficial to developing a long term approach for global investments.
- 1. Bloomberg. Comparison of the major economies from 2011 to 2020. All countries and regions are represented by their respective MSCI indexes.
- 2. Trading Economics. From June 2006 to June 2021.