Invest globally; diversify your portfolio: Ajay Shah

Excerpts from Bazaar on CNBC-TV18 Watch the full show » Nifty BSE | NSE 25/05/12 Are Mutual Funds betting on Nifty?

Independent Scholar, Ajay Shah says that it is the duty of every household investor to diversify their portfolio all over the world so as to benefit from global diversification.

Excerpts from CNBC-TV18's exclusive interview with Ajay Shah:

Q: The initial feedback that we get from most mutual fund houses is that they might want to tailor specific schemes which will lead investors to invest in overseas securities but your contention seems to be that they should be woven into the main fabric of the mutual fund schemes or diversified schemes. Is that right?

A: Actually I would go one step further. It is the job of every investor, the job of every household to diversify all over the world. This can be done either with a mutual fund giving a full product that does that or a mutual fund that offers one local scheme and one off shore scheme. Then the investor should spread his money across the two so as to benefit from global diversification.

Q: What is the key gain for a household person in doing this, is it basically a risk mitigation thing because of diversification across economies and geographies or do you think you can actually maximize returns by doing this?

A: The two questions are not that different. Firstly I will emphasize on what was said about the point of diversification. One should never put all their money in one company or country, one should spread their money across countries in order to reduce risks.

Q: For the mutual funds themselves though in terms of what the Sebi has put forth in guidelines, are they getting enough elbowroom to go out and invest like they want to?

A: This is a very small window. This is like a small toddler trying to take his first step. What has been given to them is a miniscule set of limits. The Sebi says that the grand total investment by all mutual funds cannot cross USD 2 billion, the investment by any one mutual fund cannot cross USD 100 million. The investment by any one mutual cannot cross 10% then there is a window for exchange traded funds of USD 1 billion.

These are all very tiny numbers and I guess that is how India works. We get going with something small and then gradually we do things on a bigger scale. What I would like to say to every household of the country is that this is very big, this is a profound change in the risk return opportunity available for the Indian household. Roughly speaking one can reduce his risk by half if one diversifies globally, this is big stuff.

Q: How would you build it, if you had that money to play around with, is it the Indian ADR's, GDR's or the ETF's. What looks like a more lucrative pocket to get into?

A:  I would basically put my money into the index funds of the top 20 countries of the world.

Q: Is that because of limited expertise of selecting stocks in overseas markets or companies which you may not track or basically restrict yourself to the indices and try and mitigate risk there of?

A: There are two reasons. Firstly, I do agree that we do not know much about the French economy, for instance. But the second point is that in  industrial countries, in the large matured market economies of the world, the stock market tends to be extremely efficient. It is relatively difficult to beat the market, it is relatively difficult to find undervalued stocks or overvalued stocks and index funds are extremely cheap in the industrial economies. You can get index funds managed for 5-10 basis points, so it is a very low cost high quality asset.

The first thing that I would advise every household in India is that more than half of their money should be spread across 20 countries.

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