Most financial planners and wealth management firms suggest investing in global markets as it not only helps in diversifying the portfolio but also allows investment in companies or themes that may not be available domestically. That said, there are several factors that one should keep in mind before investing globally.
Firstly, an investor needs to decide the regions and themes in which they want to invest. There are several funds that invest in companies domiciled in a single country or region. Then there are global funds which invest across geographies.
An important point to note here is that while several companies may be domiciled in a developed country such as the US, the bulk of their revenues come from markets across the world, thus they are proxies for global demand and consumption.
Think Apple Inc, for instance, whose bulk of revenues come from outside the US. Global investing can also provide access to a domestic investor to invest in niche themes and companies that are not available domestically such as a robotics/automation fund, fin-tech fund and precious metals (other than gold).
The investment route
Investments in global markets can either be made through the Liberalised Remittance Scheme (LRS) route or by investing in fund of funds (FoFs) of domestic asset management companies (AMCs).
There are several platforms through which investors can open an offshore trading account and remit funds under LRS. In this case, one needs to adhere to the LRS limits that are currently $2,50,000 per individual per annum. On the other hand, investments in FoFs of domestic AMCs are done in local currency and thus there is no limit on the amount of investment in this case.
Be mindful of cost, currency movement
The cost of investment is another important aspect to keep in mind. Through an offshore account, one can invest either directly into foreign equities or into mutual funds. Many brokers charge a minimum rate per trade, irrespective of the quantum.
ETFs will have a lower expense ratio as compared to actively managed funds or even as compared to FoFs.
The movement of the Indian rupee against the foreign currency in which the investment is made will have an impact on the overall return from global investing.
We have normally seen a lot of coverage around investing in global markets when there is some crisis in the domestic economy and the stock markets and the rupee are in a free fall.
While such a scenario brings to the fore the benefits of global investing from a diversification point of view, one should invest in global markets on a regular basis as part of their investment strategy.
If an investment is made after the rupee deprecates, chances are that the currency will pull back after some time and the returns on the global investment will be lower in domestic currency terms due to this pull back.
Conversely, if one invests in global markets when the rupee is strong and the currency gradually depreciates over a period of time, this adds to returns from the underlying global investment when looked at in domestic currency terms.
For example, if one had invested in the US markets when the rupee was at 50 against a dollar, then at the current exchange levels, the currency effect alone would have given an absolute return of around 46 percent to the investor in addition to the return from underlying investment.
Investing in global equities directly is recommended only if an investor is able to research these companies. This may be difficult for most individuals and thus investing through a fund and or ETF may be a more suitable option.
Disclaimer: The views and investment tips expressed by experts on Moneycontrol.com are their own and not those of the website or its management. Moneycontrol.com advises users to check with certified experts before taking any investment decisions.