Portfolio diversification can take various forms. The most common meaning of portfolio diversification is about investing in asset classes, sectors, market capitalization, etc. However, what investors often overlook is geographic diversification. This domestic bias in investment decisions can cause portfolios to be overly tied to the fate of a particular economy and result in investors losing out on attractive investment avenues in other countries.
global opportunity
There are various compelling reasons to consider investing in international equities. For one, the Indian equity market is a relatively small component in the global scheme of things. While India is one of the leading emerging economies, India’s equity market capitalization is about 3 percent of the global equity market capitalization. Thus, it is quite clear that there are huge opportunities overseas that Indian investors can explore.
Second, given that India is an emerging economy, Indian companies may at times lag behind their peers in the developed world in terms of access to cutting-edge technology and innovation. Consequently, one needs to diversify geographically to invest in emerging global disciplines such as electric mobility, artificial intelligence, robotics, etc. Exposure to global trends through international equities can be supplemented by exposure to older economy sectors through domestic equities. Furthermore, the low correlation of global equity markets to Indian equities makes it an effective case for diversifying into international markets.
hedging Posture risk
India, being an emerging economy, has higher inflation than developed economies and as a result, has seen currency depreciation against major global currencies over the years. For example, in the last 20 years, Indian Rupee It declined 2.3 per cent per annum against the US dollar and 3.9 per cent per annum against the euro. The depreciation of INR versus global currencies adds to the returns from international equity investments for Indian investors.
How much to invest in global equities
While it is clear that an investor needs some international exposure, the big question that arises is what is an optimal level? Although there is no scientific answer to this question, an investor can start with a modest exposure to international assets and then gradually add to it over time to diversify and reduce exposure to a single country. . It is recommended that an investor have a detailed discussion with a financial advisor to determine the optimal allocation for international equities. Investors also need a longer-term horizon when considering investing in international equities.
In today’s dynamic and volatile world, it may not be ideal for investors to restrict their portfolios within the geographic boundaries of a country. Funds of Funds is an investment opportunity that addresses this need. Strategic exposure to international equities apart from domestic asset classes can go a long way in completing the wealth building journey of investors.
(Naveen Gogia is Executive Vice President and Co-Head – Sales & Distribution, HDFC Asset Management. Views are his own)