Global investing is an additional source of wealth creation in your portfolio and helps diversify risk. Globally, different markets have performed better at different time periods and the winner continues to rotate across geographies as performers and latecomers may change even from year to year. In fact, if we compare the benchmarks, the US markets created more wealth for the investor than the Indian markets during the previous period of 3, 5, 10 years in their local currency and even more if we look at the yields in terms of INR. Investors should note that the long-term depreciation of the INR against the stronger currency like the USD will increase returns and vice versa. Domestic bias should not prevent investors from exploring these opportunities, if this matches their risk profile.
More importantly now, different geographies offer different sets of investment opportunities. While the Indian economy is still largely driven by traditional sectors such as IT consulting, BFSI, Oil & Gas, etc., the global impetus is given to technology-centric companies that are part of various megatrends that are disruptive in nature and change the very nature of things. Popular themes emerging across the world are robotics and artificial intelligence, electric vehicles, industrial automation, blockchain, digital economy to name a few. These emerging themes are increasingly part of the portfolios of global investors. Since Indian stocks offer exposure to old economy themes, one needs to look at the global investment universe to participate in these themes and mega-trends.
Depending on the purpose and objective of an individual, global investing can be part of investors’ asset allocation. Whether an investor wants to have concentrated exposure to tech stocks because these themes are lacking in India or whether they want simple vanilla exposure depends on the investor’s risk and reward profile.
In developed countries like the United States, financial markets are informally efficient, making it difficult for active funds to outperform the benchmark and this too on a consistent and after-cost basis. For example, according to the SPIVA report for the year 2020 covering the United States, active large-cap funds for the 11th consecutive year underperformed broad indexes such as the S & P500 on average. Even feeder funds that invest in active funds carry higher costs as well as the risk of underperforming the benchmark.
Passive products like an ETF or ETF-based fund of funds that seeks to replicate the performance of an index are probably better suited for investing due to their low cost and transparent portfolio with known methodology. In addition, by investing through passive products, investors can negate or minimize the risk of the fund manager, which can lead to underperformance. ETF-based fund of funds offers investors the option of investing in an ETF through a normal mutual fund as a lump sum or in installments via SIP or STP.
In order to explore investments in foreign markets, investors must first be aware of its risk profile and investment objective. Choose a fund that matches your profile and your goal, and factor in the cost as well. Ideally, investors can start with a lower allocation (eg 5%) and then over time can increase the allocation, if appropriate. With the availability of so many options in active mutual funds and now also in low cost passive products like ETFs, taking such exposure has never been easier.
(The author is the Head, Products – ETF, Mirae Asset Management India.)