Investors must never underestimate the value of a well-diversified portfolio in any market scenario. When it comes to developing an investing plan that mitigates potential losses in a market, an old saying holds relevance even today – we should never put all of our eggs in one basket.
As an investor, besides diversifying your portfolio in the domestic market, you may want to take some international exposure to give your portfolio greater stability or better returns or even both. There are many international companies that may seem like a great bet to Indian investors, but they may not know how exactly they should go about investing.
Here are some of the ways through which one can make his or her portfolio global.
Things to do before taking your portfolio global
Trading includes knowing the flow of supply and demand, whether you’re purchasing stocks, commodities, or real estate. Today’s market offers capital investment opportunities in various industries and instruments and provides opportunities for those who can spot undervalued resources before demand rises.
Being in India, information about foreign companies may not be readily available, but it is not impossible to get access to research reports should you be keen on international investing. It is critical to understand how the region’s sectors interact to invest properly in it.
Thorough research should be backed by your investment rationale, particularly when it comes to a foreign market where there are lesser chances of your physical presence.
Put your feet on the ground
While having solid research is important to understand the liquidity and likely returns from the foreign investments, you also need to have clarity on the instruments that you are investing in.
You can trade commodities from your desk or laptop wherever you are, but if you don’t understand the environment in which the contracts are traded or the people who are looking for those commodities as end-users, there is a possibility that you will miss out on information that could be critical to your decision-making process.
Foreign trading is a game of intellect and the more you can learn about any market you enter, the better.
Understand the nuances of foreign markets
Investing is not just capital appreciation. To earn profits and that from international markets requires a deep understanding of how markets work, what impacts the price movement and how their fundamentals function. For instance, job-related data in the US markets have an impact on the stock prices whereas in India such data don’t always have an impact.
Global markets carry an acute amount of risk, and jumping into them without understanding the ropes can erode your capital in no time.
Search local partnerships
If you’re a foreign player in a market, local financial institutions may be crucial support. This makes it easier to operate with the country’s money while investing in Forex and obtaining resources for other types of commerce.
Electronic banking makes it simple to transfer money into and out of a country by transferring funds between accounts in multiple locations, but you’ll need reliable banking partners in each country to enjoy quick transaction times and minimal fees.
That said, for an investor in India, it is not a compulsion currently to have an account in a foreign bank to engage in stock market trading or other related securities trading.
Your investments should be diversified
Even if you only trade stocks or commodities, participating in numerous marketplaces allows you to execute larger and better trades, as well as maximise your earnings by transferring funds to the most active marketplace at any given time. If you’re staying in one place or region, diversifying your portfolio with several techniques can provide a similar level of protection against market volatility.
You need to watch the timing if you want to get the most out of each trade. Especially given the time zone differences, this could possibly get difficult. This point also feeds into the fact that carefully chosen market investments generally yield better returns in the long term.
Also, read – How to invest outside India
How to invest in international markets?
Direct stock investment through brokerages
Invest directly in stocks by opening a foreign brokerage account. As the world becomes a smaller place, there are multiple websites/platforms that have evolved wherein an investor from India can easily open a brokerage account in a foreign country.
There are also Indian brokers who have tie-ups with foreign brokerages that assist with global investing. In such cases, you don’t need a separate account for international investing but can use your existing DEMAT and trading account for global investments.
Points to note in this route of investment are:
- As per the Liberalized Remittance Scheme (LRS), there are limits on the amount of money one can invest internationally.
- Stocks owned in a foreign currency are exposed to foreign currency exchange risk, so besides the fundamentals of the business that drive the stock price, the investment is also impacted by fluctuations in the exchange rate.
- Today most of these online platforms give the investor the option of fractional share investing, that is, you can purchase as little as 0.0001 shares of stock.
Here also, do thorough research about the brokers or investment platforms before starting your investment. Take into account the brokerage charges, forex and other fees.
Feeder funds/ fund of funds
Mutual fund route appears to be one of the common routes for having exposure to the international markets. One can get global exposure by investing in a feeder fund or a fund of funds. Fund of funds, as the name implies, is a mutual fund of a domestic company that invests in a mutual fund operational in a foreign country. For example, the Franklin India Feeder directly invests in the Franklin US Opportunities Fund. There are funds that also invest in international index funds like the S&P 500, Dow Jones, and so on.
Points to note in this route of investment are:
- No investment limits by the LRS, as you are essentially investing in rupees
- The expense ratio may be higher as it entails the management fee of the Indian fund house as well the fee by the international counterpart.
An investor can also use currencies and their fluctuation for hedging purposes. Despite the worldwide reach of trade, commerce, and commodities, cash still is the most liquid market in the world. It is considerably impacted by the interest rates, geopolitical events, and so on., giving Indian investors some great opportunities to make some profits.
While access to global investment instruments is made easy, investors should always exercise caution, particularly, retail investors. At a time when the awareness about Indian markets is still low, exploring foreign markets could be risky. The new-age Indian investor should also be mindful of the need to diversify investment portfolios.
Having said that, the mammoth success of the recently listed Freshworks on Nasdaq is a standing testimony that diversification may help the portfolio. Indian investors are said to have been the main contributors to the Indian company’s successful debut in the US market.
Now with news on the Indian bourses poised to launch their own international trading platform, more retail investors could have access to global markets and actively engage in international investing. For now, investors may take their portfolios global either through a foreign broker or investing in a fund of funds (FoF), until you as an individual investor get the needed information and clarity on the foreign financial markets and its instruments.