Investments, especially in stocks can be quite a risky venture. However, they do yield the maximum returns over the long term. You can reduce the risk on your capital while investing, by simply diversifying your portfolio. Diversification offers greater stability like none other when it comes to investments. To attain a greater balance in your portfolio, diversification in the demographics of your investments is also an added advantage.
Recent years have seen a steady growth of Indian investors investing in international markets. The foreign exchange rate has been climbing up steadily which could have contributed to the increased international investments from India.
Why choose international investments?
When the end objective is about maximum yield, then equities, either through stocks or mutual funds have always offered a lucrative deal to any investor. While companies are offering these funds and stocks in India, there are also globally acclaimed companies offering even better growth and profitability to investors. There are two major reasons to consider when you are opting for investments in the international market.
Diversification of your portfolio
Through investments in foreign markets, the risk of investment is considerably spread out and the portfolio becomes truly balanced. For instance change in government policies or regulations might affect some of your stocks in the country while your investment in other country stocks will negate the effect.
Higher growth potential
When you are investing in international markets, you are looking at globally accredited companies, and into growing economies. As you enter the emerging markets sector, you are signing up for a higher growth potential than you would ever achieve in other investments in India.
Investing in the international market
Investment in the international market has become easier than before now, thanks to the ETFs and the Indian mutual fund companies investing in foreign stocks.
You would find that majority of the investment opportunities are with the US, given that they are larger and hugely popular among investors. There is also the factor that the US and India markets have a better correlation to take into consideration. The double taxation agreement between the countries also works in favor of the Indian investors.
Before delving into investments in the international market, one has to decide on the kind of option one wants to pursue. You can choose a country-specific market, a thematic portfolio or, an index fund.
If you want to directly invest in an international company or fund, say like that of Facebook or Amazon, then you can do so online. Many websites and dedicated platforms offer these services and there are also brokers whom you can approach. If you are dealing with a broker, you need to remember to check if the broker is registered with the respective securities exchange board in that country, similar to SEBI in our country and the SEC in the US.
What you need to remember when making these direct investments is that the cost of investment will be pretty high.
Most of the foreign stocks are listed in the respective country’s currency which may or may not be stronger than Indian Rupees. For instance, investment in dollars might seem lesser but when converted into Indian Rupees, the amount might be insurmountable.
You also have to remember the LRS limit or the Liberalized Remittance Scheme limit, which is an annual limitation on how much you can invest internationally from India.
Exchange-Traded funds and mutual funds
This would require you to open a Demat and trading account. There is no minimum balance mandated in these and, you can invest in ETF through an international or an Indian broker of your choice.
While the ETFs are one route, you can alternatively look at the fund of funds, a much simpler way for investing outside India. Companies are offering multiple themes on their mutual funds like technology, gold, energy and, other commodities. There are also different geographies you can invest in, choosing the emerging markets, which has been a profitable venture for many. Again there is no need to maintain any minimum balance and it saves your time and effort in choosing the right stock to go after. You will be investing in a bouquet of stocks making your portfolio well-balanced.
International fund of funds
These are funds listed in the global market, investing in multiple international stocks and commodities. You can choose to invest in these international funds which don’t require you to have an international trading account and you can invest in your domestic currency as well. And there is no worry over the LRS limit either with this option if you are investing in fund of funds offered by Indian companies investing in international stock and currency. Additionally, you can enjoy the features of other regular investments like SIP with these funds.
There are certain globally well-known brands with operations across the world but not available in India. And yet many Indian mutual fund companies have investments diversified into global markets. If you wish to seek global exposure, then you can opt for these Indian companies to invest in and gain the same level of diversification.
Risks you need to know about
While global markets are lucrative, there are of course certain risks associated with investments in the international market.
““I will tell you how to become rich. Close the doors. Be fearful when others are greedy. Be greedy when others are fearful.”— Warren Buffett
- Investment cost. The cost of investing in the international market is and will be considerably higher than what you need to invest in the domestic exchange.
- Impact of foreign exchange. The rate of conversion between different currencies constantly changes which means it can have an impact on your returns. For instance, if the currency conversion rate between Indian Rupee and Euro varies, then it can increase or decrease your investment returns. There is of course the silver lining of having a positive impact in this scenario.
- Information availability. When you are investing in companies from different countries, you may not always be provided with all the information you need in comparison to an investor from the same country. There is also the language barrier to keep in mind and the understanding of the legalities and other terms associated with the country.
- Investments. The international markets can be affected by certain global events, in that country or any other which might affect your investments. However, this is a risk even for domestic investments.
- Liquidity level. You should also check out the trading volumes in the respective country and calculate your liquidity level before choosing to invest in a specific stock.
- Legal Issues. In case of any issues with investments or the companies, it has to be taken up with the respective country’s legal forum and not in India. This might have an unfavorable outcome for you.
When you invest in the international market, you gain to reap the benefits of the world market while balancing out your investment portfolio. However, you need to be mindful of the flipsides or the risks associated with international investments. You can choose either direct or indirect investments into global companies, depending on your investment knowledge, investment experience and, your convenience. You can engage with an investment advisor to understand the risks better and to balance the pros and cons before choosing the right investment.