A roadmap for global diversification of your portfolio

Beyond the prerequisite for any investor to have a clear understanding of one’s investment goals and risk tolerance, the global investor needs to be armed with a thorough comprehension of international markets, asset classes and investment mediums.

Data shows that barely 1-2 per cent of the financial assets of Indians are diversified internationally. This compares poorly with the Chinese who hold about 7 per cent international assets and even worse in comparison to developed markets such as the US, UK and Japan, where global diversification is over 20 per cent.

But the Indian investor landscape is changing as younger investors are warming up to the idea of striking out foreign shores. Typically, those in the age group of 30-40 years and already invested in Indian assets are the ones venturing into adding foreign assets to their portfolio. Interestingly, about 30 per cent of these hail from Tier-2 / 3 cities. In terms of motivation, 50 per cent are looking for geographical diversification, 30 per cent  are creating a fund base for education or travel and another 20 per cent are looking to invest in specific global companies.  

Advantages

Global investments open doors to an assortment of companies across industries, enabling risk diversification and potential returns maximisation. Also, investments into FAANG (Facebook, Amazon, Apple, Netflix and Google) stocks or Tesla and AI companies, give Indians an opportunity to tap into global trends.  

Another key aspect of this diversification is the exposure to different currencies. For instance, as the Indian rupee depreciated from Rs 70 a $ to Rs 84, it spelt higher returns, driving incremental interest for investing in international asset classes. Global investing also acts as a hedge, safeguarding against local currency and economic fluctuations.

A case in point are recessionary pressures the US has been witnessing which pushed down stock prices, increased volatility and a sectoral rotation from growth-oriented sectors to defensive sectors. It is worth noting that recessions have historically been followed by periods of economic growth and subsequent bull markets. Consequently, the current scenario presents opportunities for investors to purchase undervalued stocks at discounted prices, potentially setting the stage for attractive returns in the future.

Route

Most popular mediums for global investments are exchange-traded funds (ETFs), international funds and offshore structures. That apart, many opt for opening a trading account with a foreign broker, with links to an Indian broker, to gain direct access to global companies such as Nvidia, Apple, Alphabet, etc.

This partnership enables a range of functionalities on global stocks and capital market instruments, including baskets, systematic investment plans (SIPs), and portfolio construction. Fundamental and technical analysis of global markets is also possible through these partnerships.

Gift City is another popular jurisdiction for Indian investors seeking outbound investment opportunities. It has gained popularity rapidly, especially among family offices and foreign investors. The exchanges in Gift City currently facilitate investments in the top 50 US stocks, with more stocks to be added later. This not only enables Indians to invest in US stocks near home but also offers large tax benefits to investors.

(The writer is Chief Strategy and Transformation Officer, HDFC Securities)