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Time To Think Global While Diversifying Your Portfolio

In today's interconnected global landscape, Indian investors are progressively seeking global products to broaden their investment portfolios and tap into lucrative prospects outside domestic markets. As per the RBI’s Liberalised Remittance Scheme (LRS), individuals can remit up to USD 250,000 annually, facilitating investments in equities, debt, and overseas real estate. Investments can also be made through INR-denominated funds and ETFs on overseas indices. These are offered by Indian mutual fund companies.

Diversifying into global products presents several benefits, including risk mitigation against overdependence on the Indian market. By expanding investment horizons beyond national boundaries, investors can enhance portfolio resilience and seize diverse opportunities in the global arena.

First and foremost, expanding investment portfolios globally grants access to a diverse array of sectors that may not be readily available within Indian markets. Industries such as social media, big pharma and semiconductors have created enormous wealth for global investors. But such opportunities are hardly present in India. These investment avenues can be accessed only by those Indian investors who are willing to look beyond domestic markets.

Additionally, while some investment products may exist domestically, the lack of variety can limit individual choices. For instance, the abundance of options in overseas real estate investment trusts (REITs) provides Indian investors with a broader range of investment avenues compared to the limited offerings in India.

In the past decade, products like cryptocurrencies and Non-Fungible Tokens (NFTs) have caught investor attention. However, the pace of innovation has been so fast that no common overarching regulatory framework has been developed yet. Different countries regulate and tax these products in different ways.

Indian investors face high taxation while on gains made on owning cryptocurrencies. They can get better outcomes by investing in stocks of crypto mining companies or crypto ETFs which give similar exposure as owning cryptos. Moreover, accessing assets unavailable in India or those with lower costs abroad expands investment opportunities and optimizes asset allocation strategies.

The starting point for an investor who is looking to reduce home bias could be to consider investing in the US stock market, especially the large-cap companies there. The US stock market makes up more than half of the global market cap. It is mainly because large US companies tend to be bellwethers of global megatrends since most of them have businesses and markets across the globe. They are also usually the first innovators or adopters of new technologies ushering in business disruptions and giving birth to new industries. Looking overseas can enable investors to capitalize on megatrends such as automation, clean energy, artificial intelligence and digitalization that transcend national borders.

The natural depreciation trend of INR against the US Dollar, due to macroeconomic factors, also necessitates investment in assets denominated in the US Dollar. This acts as a hedge, shielding investment portfolios from adverse currency movements. It is especially critical if there is a future need to spend significantly in US Dollars such as kid’s education.

Ultimately, international diversification enhances portfolio resilience by spreading risk across different markets and asset classes. While short-term market downturns may trigger simultaneous setbacks across global markets, the long-term benefits of diversification outweigh transient fluctuations. Indian equities, while historically offering attractive returns, often come with significant volatility and prolonged drawdowns, emphasizing the importance of global diversification for long-term wealth preservation and growth.

In essence, embracing global diversification is not merely a strategic choice but a necessity for prudent wealth management. By broadening investment horizons beyond domestic borders, investors can weather market turbulence with greater resilience while optimizing risk-adjusted returns over the long term.

Incorporating global products into asset allocation strategies demands meticulous attention to market dynamics, sectoral trends, and currency fluctuations. While the US market serves as a prevalent gateway for globalizing investments, prudent investors recognize the diverse opportunities presented by regions such as Europe and other emerging markets.

Mohit Ralhan

CEO, TIW Capital

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