Akhil Chaturvedi
Investing is all about diversifying money into multiple asset classes to reduce risk from any single asset class. Managing risk is the key element in investing, and how you can reduce the risk of losing capital and still ensure superior returns.
Gold, real estate, fixed income, cash, commodities, domestic equities and international equities are some of the popular asset classes available to investors to choose from and depending on what outcomes (returns) you desire – a mix of all these classes in certain proportion will do that.
For example, for a low-risk investor high debt/cash allocation and Gold and lower equities would be appropriate; for high-risk investors higher allocations to equities and lower allocations to debt/ cash would work.
Speaking about international investing, especially international equities, it’s just one more asset class now available to us to spread our equity risk from only domestic equities to domestic + International equities.
Equities is basically buying shares of a set of companies and benefit from the growth of these companies over a period of time, there are great companies all over the world - India, USA, Europe, UK, China, South Africa and Japan to name a few.
Now, while we do have a natural understanding of Indian economy and Indian companies and that gives a lot of comforts to make higher allocation towards Indian equities, with help and understanding it may make a lot of sense to benefit from the growth of companies outside of India.
What we have seen in the past is that there is a significantly low correlation between Indian equities and equities around the world, which means that there will be time frames when say US stock markets produce superior returns and Indian markets may remain flat and similarly other stock markets as well.
In equities, it is almost impossible to predict the future, especially immediate future, and hence timing the markets could be a futile exercise. This holds true to stock markets around the world.
Hence, it makes sense to simply make a portfolio with a mix of Indian and International equities in the portfolio in proportion comfortable to you and wait for the returns to play out over a period of time.
You will observe with the time that some years India will do good and then some years US or China or Japan or some other country will do well.
Therefore your overall equity portfolio will do reasonably well with a mix of equities local and global equities, lower volatility, and better risk control and superior returns.
Now, there are several opportunities available to Indian investors to buy international equities, Index funds, ETF’s, active feeder funds, and also directly buying company of your choice through stock broker.
Although, one should be very careful buying individual companies in absence of proper understanding of the market and company and use either index funds and feeder funds which are professionally managed by reputed mutual funds.
In summation, the benefits of international investing is as follows:
1. Participate in growth of global companies
2. Diversification of risk in equities from ‘one’ country to ‘multiple’ countries
3. Benefit from low correlation
4. Currency Hedge
(The author is Associate Director and Head of Sales and Distribution at Motilal Oswal Asset Management Company Ltd.)
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.
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