Global investment provides an additional source of wealth creation in your portfolio and helps diversify the risk. Globally, different markets have performed better in different periods and the winner keeps on rotating across the geographies as the performers and laggards may change even on a year to year basis. In fact, if we compare the benchmark indices, US markets have created more wealth for the investor than Indian markets in the previous 3, 5, 10-year period in their local currency and even higher if we look at the returns in INR terms. Investors should note that depreciation of INR over the long-term v/s the stronger currency like USD, will add to the returns and vice-versa. The home bias should not stop investors from exploring these opportunities, if it fits into his or her risk profile.
More importantly now, different geographies offer different sets of investment opportunities. While Indian economy is still significantly led by traditional sectors such as IT consultancy, BFSI, Oil & Gas etc., globally impetus is on technologic centric firms that are part of various mega trends which are disruptive in nature and are changing the very nature of doing things. Popular themes which are emerging across the globe are robotics and artificial intelligence, electric vehicles, industrial automations, block chain, digital economy to name a few. These emerging themes are increasingly becoming part of global investor’s portfolios. Since, Indian equities provide exposure to old economy themes, one needs to look at the global investable universe to participate in such themes and mega-trends.
Depending on an individual’s aim and objective, global investing can be a part of investors asset allocation. Whether an investor wants to have concentrated exposure to tech stocks because those themes are missing in India or whether he wants a simple plain-vanilla exposure, depends on investor risk and return profile.
In developed countries like the US, financial markets are informationally efficient as a result of which active funds find it difficult to outperform the benchmark and that too on a consistent and after cost basis. For instance, as per SPIVA report for year 2020 covering US, active large-cap funds for the 11th consecutive year have underperformed the broad-based indices such as S&P500 on an average. Even the feeder funds which invest into active funds carry higher cost along with the risk of underperforming the benchmark.
The passive products like an ETF or an ETF based Fund of Fund which seeks to track the performance of an index are probably better suited for investment because of low cost and transparent portfolio with a known methodology. Further, by investing via passive products, investors can negate or minimize the fund manager risk which can result in underperformance. The ETF based Fund of Fund, provides an opportunity to investors to invest in an ETF through a normal mutual fund route in lumpsum or in a staggered manner through SIP or STP.
In order to explore investments in foreign markets, investors should first be aware of his risk profile and investment objective. Choose a fund which aligns with your profile and goal and consider the cost too. Ideally, investors may start with a lower allocation first (for example 5%) and then over the period of time can increase allocation, if it’s suitable. With the availability of so many options in active mutual funds and now also in low cost passive products like ETFs, taking such exposure was never easier.
(The author is the Head, Products – ETF, Mirae Asset Management India.)