Global Investing: Why You Should Diversify Overseas
You're reading Entrepreneur India, an international franchise of Entrepreneur Media.
The Indian stock market has obviously gone through a tumultuous time in the last six months. And expectedly, investor activity has ebbed and flowed with market sentiment. Of course, this happens every few years in India and other high-volatile markets.
We know that investing is efficient when our portfolios are diversified. But we typically, limit this diversification to asset classes in local markets only. Distribution of investments among local mutual funds, direct equity, fixed deposits, bonds and some sophisticated instruments may not be enough in times of general stock market downturns in India.
So, why constrain investments? By investing only in local markets, we concentrate risks and limit opportunities.
Diversify with lower risk
Mature markets such as the US are less volatile than India. Standard deviation—a measure of risk—for US markets is 12.6% compared with India’s 17%. So, while an investor may get outsized returns for a short period of time in India, the losses are also likely to be steep when the market sees a trough. Investing overseas is a good way to make steady gains at lower risk.
Additionally, markets like the US also provide exposure to treasury products that are often rated higher and are usually broader in range and choice than in India. Adding stricter governance to that, one is on a very solid ground.
Interestingly, many US exchange-traded funds (ETFs) are actually cheaper than Indian mutual funds. Expense ratios for marquee funds can be as low as 0.03% in the US.
It is well understood, and has been commonly observed, that the rupee depreciates relative to the US dollar in any timeframe of five years. For medium- and long-term investors, it just makes sense to invest abroad as long as relevant products can be identified. And while it’s not uncommon to hear that Indian fixed deposit returns and savings account returns are far more than US fixed income returns, we often fail to adjust for inflation while making this comparison.
On top of that, it seems quite unlikely that USD-INR equation will reverse in the foreseeable future.
New opportunities—hidden in plain sight
Well, investing in Amazon is not technically a ‘new’ opportunity, is it? That being said, people like to invest in areas of their personal comfort. Over 70% of the time in our daily lives we use products that are made and/or sold by companies that are listed outside India. In our own way, we help these companies grow every day. Not participating in the growth of the same companies would mean we are not putting our rupee investment to best use.
And that is just a simple way of looking at it.
There are other, slightly more thoughtful ways of looking at opportunities we miss by keeping all our investments local. For instance, the US has American Depository Receipts of many global companies that we keep hearing good things about. Many Chinese majors, European giants, popular South Asian product manufacturers and more, are listed in the US. Plus, through the US-ETF route, one can actually invest into pretty much any global theme.
As one would imagine, many of these opportunities are not particularly hard to identify.
Reserve Bank of India data, related to Indians’ overseas remittances in 2018-19, suggests that close to $8.5 billion was sent by Indians for education and travel abroad. It’s likely that most of this money was sent or spent at arbitrary forex rates; meaning, most people would not have been able to plan their fee and travel expenses based on rate of the USD or other similar currencies.
You just pay the fees when it is time to pay the fees!
But these expenses can actually be reduced if planned properly. We typically start saving money for education three to five years in advance. Enough time for us to plan our savings into low-risk instruments in markets such as the US and the UK.
It’s time we stop waiting for another market crash to push us outward. It’s time we diversify.