Written by Suresh Sadagopan
We keep telling ourselves that India offers the best returns as we are still a developing market and the returns here should be higher as compared to developed markets. This is mostly due to the comfort we have developed with our own markets, which we know well & have been investing in. This is the home country bias.
Is there a case for investing in equities abroad? We keep thinking that investing in India gives us the best returns. India being an emerging economy can give higher returns is the thinking. But, is this thinking borne out by the facts? Let us see.
In the above tables, we have the performance indicators for Indian, US & other worldwide indices. If we look carefully, many US indices have performed at a similar or better level than Indian Sensex, across time frames. The story about other international indices is not that rosy – actually; they have performed rather poorly in comparison to Indian Sensex or most US indices, especially over a five-year timeframe. Even if we extend the period to 10 years, the situation does not change much.
It is clear that on a performance basis, US indices perform as well or better than the Indian indices. Is that the only reason? No.
Reasons why you should have International equity exposure
By investing internationally, we get to participate in the international growth potential in other economies.
There would be areas which India may not capture in its economy. For instance, high tech chip designing/ manufacturing companies are not there in India. Robotics & factory automation segment is not really present in India. To participate in some of these sectors we need to invest in those markets, where these companies are listed.
We get geographical & currency diversification by investing internationally. The risk of the portfolio gets spread out & lowered with this strategy. Also, political system risk and country-specific risks can also be eliminated to the extent of investment in international markets.
When one has goals denominated in dollars ( or other currencies ), one can invest abroad to safeguard the dollar amount from fluctuations & coming up short for the goal. Hence, if for instance USD 50,000 is required for a goal, one can invest the amount in dollar-denominated assets so that the amount needed for the goal is available on an assured basis. Here we are eliminating the currency fluctuation risk.
International equity investment options
Let us evaluate the options to invest abroad.
One can invest directly in shares of companies listed abroad. Some entities allow one to invest in shares abroad, but one will have to open a separate trading account for that. Identifying & buying shares abroad is not as easy as one may think.
Most people cannot think beyond Google, Apple, Amazon, Facebook & a dozen other companies. For selecting good candidates for investment, one needs to understand the markets it serves, the nuances of the firm’s business, the industry sub-sector and the competitive position of the company in the markets it serves, etc.
It is difficult to pick and choose global shares on one’s own, sitting here in India. A better way would be to invest through professional fund managers.
Shares bought abroad & sold at a profit will be subject to capital gains @20% with indexation, after 36 months. In the case of listed Indian shares, they are subject to capital gains @10% without indexation, after 12 months ( which is payable if such capital gain is over Rs.1 Lakh ).
Other investments like Index funds/ ETFs abroad are also possible. But they again require a different platform, would incur transaction/ holding costs, money transfer costs to India, taxes, etc. This could still be a viable option & can be explored.
There are costs involved in international investments which will be higher than investing in India & always have to be borne in mind. Also, the currency fluctuation is a common factor when investing internationally, which can increase or decrease the returns in Indian Rupee.
International investments through Professional Fund managers
An easier way to invest in international equities is through Indian MF schemes. These schemes are of two types – Feeder Funds & Funds that invest directly in International equities.
In the case of Feeder Funds, the entire investment mop-up in that fund in India is directed to an existing international equity scheme abroad. The advantage here is that we are entrusting the funds to an experienced fund manager in those markets, who will now manage our money as well. Eg. Franklin India Feeder Franklin US Opportunities Fund. Here Franklin US Opportunities Fund is the fund abroad into which the money gets invested in.
There are other MF schemes that invest internationally, where the fund manager chooses the equities to invest in & invests directly into it. Here, the fund manager is sitting in India & is trying to pick and choose the companies that would form a part of the portfolio. There is some limitation in this approach as the entire analysis will be based on data alone and the fund manager/ analyst team may not have a true feel of the company they are investing in or the market they serve. Eg. ICICI Pru US Bluechip Equity Fund is a fund where the fund manager selects the equities to invest in & puts together a portfolio.
There is yet another type of fund. This will be a fund wrapped around a foreign Index / ETF. This would come under the head of Fund. This would be an excellent tool to get exposure to foreign markets, through passive investments into their indices. An example of this is Motilal Oswal NASDAQ 100 FOF.
Apart from this, there are portfolio management services ( PMS ) offered by Fund managers where they put together an International equity portfolio based on their investment philosophy & mandate they have for the service. These products are generally focussed investments that try to perform much better than the chosen index, over a period. These could be considered too if they are sufficiently differentiated from MF schemes & offer rewards for risks not available through MFs. We may suggest PMS if credible options show up & for diversification purposes.
Other International investments
One can invest in properties abroad. There are several problems in such an investment as managing property in another country from India will be challenging. The income needs to be transferred back to India, incurring costs again. The income so earned will be subject to income tax, as per applicable rates.
The ticket size of such investments is usually large & hence turns out to be concentrated bets. Hence, these investments are not everyone’s cup of tea.
Also, it may be even more difficult to estimate the appreciation potential of properties bought abroad ( it is difficult to assess it even in India ) & there is a chance of one’s investments turning into duds. A case in the point is real estate investments in the Dubai region, which has lost significant value in the last few years.
The key takeaway
It should be apparent by now that out of all investment options, investing Internationally taking the Indian MF route, is the easiest option. The ticket size can be as low as one may want, liquidity is assured & costs are moderate. If one has goals that may require funds in international currencies, then this could be a good investment to make.
International exposure is good to diversify the portfolio in terms of risk & stabilise returns. We get to participate in the growth in other geographies, capture growth potential in sectors/ companies that one may not find easily in our country, capture the dynamism of regions, diversify investments in terms of currencies.
The object is to invest between 10-20% in International assets. It is needed to reduce the risk in the portfolio through diversification, boost the return potential & make one’s portfolio robust.