If the COVID pandemic has taught the world a compelling lesson in finance, it’s that it takes money. And it is not enough to earn it, it is also necessary to keep it so that it takes value and that it remains accessible to you at all times, in all circumstances.
Mutual funds offer a viable way to do this, but here too you have to store the eggs in multiple baskets. A judicious distribution of your corpus between debt, equity and hybrid funds is important. Geographic spread of risk is also essential, say personal finance experts.
In a highly connected world, events in one country certainly have an impact in other markets, but that influence tends to be limited. The business cycle varies, and global markets generally do not move in tandem.
Isolation of risks
Therefore, to protect your savings from the vagaries of the Indian stock market, it may make financial sense to invest a selected amount in international markets. Moreover, perhaps because they enjoy greater financial power, the markets of advanced countries are generally more resistant to crises. Thus, your investment is also adequately amortized.
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Today, investing in the shares of a company listed abroad is made easier by mutual funds. Most of the best MF houses in India have programs that give you exposure to foreign scripts. These stocks are most often part of the best indices such as the Dow Jones, the Nasdaq, the LSE and the Hang Seng. While some funds invest entirely in stocks, bonds and global currencies, others opt for a mix of national and global stocks in varying proportions.
Many of these programs are, in fact, funds of funds (FoF) – they invest in units of funds that invest in foreign markets. There is also an option to invest directly in US stocks by opening a US brokerage account. For newbie investors and those more risk averse, investing through an Indian MF with foreign holdings might be a more viable option.
Investing in money market funds focused on foreign markets not only diversifies your risk, but also allows you to profit from the performance of non-Indian stock markets. India’s GDP is estimated to be barely 3% of global GDP. This means that by investing in global stocks, you can tap into that 97% that is still out of your reach.
“International funds have been in the limelight lately due to their impressive performance over the past few years,” said Tejas GV, co-founder of Cerebral Investments & Fiduciary Services, a wealth management company based in Bengaluru.
“These programs have a strong case since 90% of the investment opportunities in the world are outside India. Since the Indian market has a very low correlation with some of the overseas markets, having global exposure ensures healthy diversification and gives exposure to foreign currencies as an asset class, ”Tejas said. Federal.
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The risk around the rupee, whose weakness has long been a pain point for the Indian investor, is also hedged by investing in foreign stocks, especially those denominated in dollars.
First time there?
If you’ve never invested in foreign stocks and are planning to get started now, you need to decide first how much of your funds are going. It depends on the level of risk you can take. The younger you are, the more money you have, and the fewer your immediate commitments, the more you can invest abroad. Consult with a financial expert before making a decision.
According to Tejas, who is also president of the Karnataka Association of Mutual Fund Advisors (KAMFA), the rule of thumb here might be: about a tenth of the total corpus. “Investors could allocate 10-15% of their portfolios to global funds,” he observed.
Pay close attention to the Fund Facts. For beginners, it would be a good idea to invest in global funds that are independent of the industry. Industry-specific funds, such as those focused on manufacturing, real estate, IT, etc., are best suited for investors who have already invested in general funds and know their way.
However, look for funds that allow you to dive into industries that are still emerging in India. “International funds provide investors with several opportunities in new age industries like e-commerce, social media, electric vehicles, cybersecurity and cloud computing, among others,” Tejas said. “Amazon, Netflix, Facebook, Twitter, Louis Vuitton, Walmart and Tesla have outperformed in recent years. You can get exposure to these stocks.
Even here, there are several varieties of schemes, such as global funds (domestic + foreign), international funds (foreign only), regional funds (such as Europe only), and national funds (such as US United only). Tejas advocates investing in funds that are not country specific, especially for beginners. Once again, it is about diversifying the geographic risk of your portfolio.
While some wealth advisers tell their clients not to be interested in emerging market equities, others advocate investing in these as well, but to a lesser extent.
The fund manager can make or break the performance of a fund, so pay attention to this detail as well. If you invest in US stocks, make sure the fund manager is based there. He or she is bound to be more aware of market conditions than one based in Mumbai or Delhi.
What makes global markets, especially the most advanced ones, even more attractive is the regulatory environment there. There are strict standards regarding financial reporting, auditing and business practices, which means greater transparency for the investor.
What you should pay attention to
However, it’s not just peaches and roses. Markets are prone to react to political, social and economic upheavals; it means you have to follow world events carefully.
While emerging markets such as China can offer attractive returns for certain periods, they can also collapse without warning. In addition, rising geopolitical tensions can have an impact on markets, even those of advanced economies.
There is also the question of taxes. Depending on the length of your holding, short-term or long-term capital gains taxes are applied to your returns, per tile. You should take this into account when calculating returns on investment.