The willingness of Indian investors to geographically diversify their portfolios and seriously consider foreign portfolio investments (FPI) is a relatively new shift in perspective. As an emerging market, it certainly offers stupendous investment opportunities, particularly after the subprime mortgage crisis of 2007-08. However, many factors have contributed to the changing perspective of Indian investors.
The pandemic left everyone across the globe in a lurch. Financial markets were no exception. The global economy collectively suffered heavy losses, particularly during the first few months of 2020. While all the markets fell, some were left worse off than others. This brought into perspective the importance of geographical diversification.
One way to manage your investment portfolio and mitigate its risk profile is to diversify your capital allocation. You’re essentially avoiding putting all your eggs in one basket with diversification. There are many ways to diversify your portfolio, such as
1. Across assets, i.e., allocating investment capital to various asset classes, for example, real estate, shares, collectables, commodities, etc.
2. Within assets, i.e., diversified allocation of investment capital in the same asset class. For example, when you invest in the stock market, you could invest in companies from different industries; within the same industry, you may allocate different percentages of your capital to various companies.
3. Different types of investors employ different investment strategies or a combination thereof. Popular approaches include rupee-cost averaging, index investing, value investing, buy and hold, etc.
4. By investing in markets other than your native country, you can diversify your portfolio geographically.
Due to accelerated globalization over the past couple of decades, all economies are now intricately connected. The interdependence is especially apparent in how many MNCs that have succeeded in local markets have expanded their operations in other countries to reap the benefits of lesser cost of operations. This is called outward direct investment. It is a type of cross-border investment that has become increasingly commonplace.
Another type of cross-border investment is inward investing, aka foreign direct investment (FDI). Companies make significant investments in a foreign market or company using mergers, acquisitions, joint ventures, etc., in the target country. India and China as emerging markets have been beneficiaries of many FDIs.
Another business strategy many companies employ is cross-border listing. This is when a company lists its shares on a stock exchange other than its native stock exchange. For example, an Indian company listed on NSE or BSE can list its shares on Nasdaq, provided it meets the required criteria.
But it’s not just companies and other institutions that are exploring the option to widen their investment opportunities. A further result of globalization is the free flow of goods and services. Some companies, such as Apple, Microsoft, Facebook (Meta), Netflix, Amazon, Google, Samsung, etc., have become a staple in our daily lives. It isn’t surprising that individuals are willing to invest in lead innovators like these. After all, who wouldn’t want to be at the front of pioneering technology?
We must account for a couple more factors when discussing Indian investors’ changing outlook regarding global investments. Ten years ago, the scepticism about foreign investments was entirely justified. One of the biggest reasons was inaccessible paths to making investments. The inaccessibility was due to high brokerage, taxation structures, significant initial capital owing to unfavourable conversion rates, etc.
While some risks such as inflation and unfavourable conversion rates remain, many other barriers are brought down. A lot of the equity mutual funds in India now have exposure to fast-growing, technology companies in the US. In fact, there have been various ETFs and Fund-of-Funds which have been launched in the past few years and track the US indices.
After the initial fall of markets at the beginning of the Covid-19 pandemic, the more developed markets such as the US have stabilized. In contrast, the more significant fluctuations in the Indian market significantly affect the value of investments and how Indian investors react towards them. Additionally, if we compare the performance of the US market to that of India over the last decade or so, the former has outperformed the latter by leaps.
While developing economies like India provide more options for investment, developed ones such as the US, with prudent decisions, can provide greater returns. Given the circumstances, it is obvious why many successful Indian investors have now overcome their bias and scepticism and are looking to invest abroad.
Don’t wait until it’s too late.
Start today and secure your future.
