The World In Your Pocket

Hemant Rustagi
Chief Executive Officer, Wiseinvest Advisors

Diversification in your portfolio is one of the key factors that determine the level of investment success you can achieve over time. While usually investors diversify their portfolios by investing across different asset classes like equity, debt and gold, investing in international markets is another effective way to do so. Global investing adds a new dimension to diversification as international markets are un-correlated in a number of ways and one gets an opportunity to invest in economies that either have a current account surplus or low fiscal deficit.

Remember, developed and emerging international markets have different levels of risk and potential return. However, it would be prudent to highlight here that one should ideally be considering international investing only after building a decent-sized domestic equity portfolio. That’s because one must be comfortable with the nuances of investing in equity markets before expanding one’s investment universe. Considering that not many investors may be aware of the names of the companies outside India, investing through a diversified investment vehicle like actively managed mutual funds or exchange traded funds (ETFs) can be a good idea.

In fact, taking this route not only simplifies the process of investing globally but also reduces the risk as well as lowers the cost of investing. As is evident, international funds launched by mutual funds can be an efficient vehicle to invest globally. These are mostly ‘fund of funds’ that invest in existing global funds. These global funds, in turn, invest in companies within a country or region, as per its stated investment objective and strategy. Mutual funds currently offer international funds that either follow a certain theme like investing in companies associated with commodities, agribusiness and in emerging markets or invest in a specific country or region such as Brazil, United States, Europe, China, Latin America and ASEAN countries.

Then, there are funds that have exposure of up to 35 per cent in international markets and 65 per cent in domestic markets. Like any investment strategy, there are pros and cons of investing globally too. While the biggest benefit is achieving diversification in a true sense, one must be aware of what can go wrong before taking a decision to invest in international markets. First, there are geo-political issues that can impact performance of these funds. Considering that geo-political issues receive substantial media coverage, the impact can be of varying degree depending upon second-order impact of these issues.

Second, if the rupee appreciates, it impacts the performance of international funds negatively. In recent times, while a depreciating rupee helped investors gain more from global investing, the returns could get negatively impacted when the reverse happens. However, considering that the Indian rupee has been depreciating against the US dollar over the years, this is not really a major challenge for investors. Third, since these funds invest more than 65 per cent of their assets in international markets, investors can claim only tax benefits that are applicable to debt funds.

Hence, any capital gains arising from international investments becomes eligible for long-term capital gains only after 3 years as against one year in domestic equity funds. However, one gets indexation benefits and hence pays 20 per cent tax after claiming indexation. Short-term capital gains are taxed at one’s applicable tax rate. Once a decision is made to invest, one must carefully select the country or region where one would like to invest. It will be fair to say that US markets have to be an integral part of one’s international exposure.

As a rule of thumb, around 10 per cent of the portfolio can be invested in international markets. To sum it up, while international opportunities deserve a closer look, the core of the equity portfolio for investors, especially those who are in the initial stages of building their portfolio, has to be domestic funds. It’s important not to allow the glamour of investing in a global market sideline other factors such as suitability and investment objectives.