In an increasingly Global World, investors are slowly warming up to the realization of not limiting their investments to the domestic market. In our opinion there are atleast three Compelling reasons to invest Globally viz.,
India accounts for only 3 per cent of the Global Market Capitalisation. This means that if you are investing in only domestic stocks, you are being exposed to only a tiny part of what the World of investing.
Secondly, By not diversifying in Global Funds, you actually end up missing out on certain Sunrise Sectors or Growth Themes. Although India holds the tag for fastest growing Economy, currently almost all equity investment opportunities arising are in Sunrise Sectors which are not available on Indian exchanges. These sectors include consumer internet (such as Facebook and Alphabet), e-commerce (giants such as Amazon and Alibaba), consumer brands such as Nike and Adidas, and Payments such as Visa and Mastercard.
Another important argument in favour of global investing is that Stock Indices of different Countries do not exhibit the same performance in a certain time span. In 2015, European stocks had been the World’s Top performers. The same year, it was reported that Japan’s benchmark stock index had outperformed and had climbed to its highest level in 15 years. But back home, in India, it was a turbulent year for Indian stock markets due to a plethora of factors. Thus, adding a Global flavour to your investments truly diversifies your portfolio, unlike a 100% domestic portfolio which only provides partial diversification.
For some investors, a compelling reason to invest globally is simply because it is possible to do so easily with the help of Mutual Funds. Fund houses allow domestic investors to invest in Fund of Funds, wherein you can indirectly invest in an International Fund. This way, you can not only leverage the expertise of Global Fund Managers but also get easy access through a domestic Fund House.
About International Mutual Funds…
International Mutual Funds are those that primarily invest in Equity, Equity-related instruments, and Debt instruments of companies listed outside India. These funds are also known as Overseas or Foreign Funds. These can be a suitable investment vehicle for investors who are looking at long term opportunities and portfolio diversification elements beyond those available to them in the Indian markets. There are three types of international mutual funds.
Global Funds: You may get the impression that Global Funds and International Mutual Funds are synonymous but there is a difference. Global Funds invest in companies in countries across the globe including the investor’s home country while International Mutual Funds invest in companies of all countries except those of the home country.
Regional Funds: Regional Funds invest in companies from a specific geographical region, for instance, Europe or South East Asia. Investors who have knowledge about regional markets can buy multiple Regional Funds instead of International or Global Funds.
Country Funds: Country funds invest in companies belonging to one foreign country. The advantage here is that investors do not have to monitor cross geographical data and they can benefit from a specific country’s economy.
Global Sector Funds: These focus on investing in companies of a specific sector across various countries.
Currency Fluctuations….
Through International diversification, one can tap into the Powers of Exchange Rate fluctuation to grow your Wealth. Foreign investments can go a long way in providing a buffer against Rupee Depreciation. When the rupee falls against the currency of your chosen International Market, then you get more rupees per unit of the currency invested and the net asset value (NAV) rises and on the other hand, when the rupee appreciates, the NAV decreases. For instance, if you invest $2,000 in an International Mutual Fund when 1 USD = ₹70, your cost of investment in the native currency would be ₹1,40,000. Now if after a few months, the exchange rate climbs to ₹75, your investment value will be ₹1,50,000. This means that you will have made a profit of ₹10,000 from currency fluctuations alone.
Taxation – Fund of Fund…
Short Term Capital Gain Tax according to the income tax slab of the investor would be applicable if sold before 36 months. If the units are sold after 36 months, a Long Term Capital Gain Tax of 20 per cent with Indexation is levied.
How and Who should definitely invest….
There are three ways to invest Internationally – One can invest directly in International listed Companies; Secondly one can invest in an Index / ETF of a Country and three you can invest in a Fund – Diversified or Thematic. In our opinion apart from investors looking for diversification, one can utilise this exposure to foreign money to meet major financial goals (like your child’s wedding or college education). Under the Liberalised Remittance Scheme, customers are allowed to transfer up to $2,50,000 per Financial Year abroad to invest (approx. Rs 1.8 crore).
Key takeaways…
An investment horizon of over 3 years or more is ideal in Global Funds as it will flatten the risk of short term geopolitical events. International Exposure under Expert Management… One may not have adequate knowledge about the foreign country’s economy and the industry; the Expertise of Global Fund Managers can be of great help.
- by Rajesh Bansal, Managing Director, Midas FinServe
