Heard of the famous FAANG stocks? The acronym stands for the famous 5 companies – Facebook, Apple, Amazon, Netflix and Google. With technology driving the global growth, more so amidst Covid times, every investor wants to have a piece of them in their portfolio. The FAANG stocks have outperformed the broader S&P 500 index for this year. But should you invest in them, or for that matter in the global markets to chase high returns? Before you jump the gun, you should know that international equity markets are as risky or even more compared to our Indian markets. Firstly, every economy goes through its periods of ups and downs which in turn impact its companies and its stock prices. This is the fundamental fact which holds true for any economy in the world. Secondly, currency movements are volatile and rupee value fluctuates based on global fund inflows. This makes it even riskier. So, should you invest in international markets then? You should invest but for the right reasons. These are:
Global Diversification: Diversification is one of the important tenets of investing. This should be one of the primary reasons to invest in the global markets. This will ensure your portfolio does not depend upon the fortunes of any single market. This is aptly evident in the performance of different markets in the chart below. No one country has consistently topped the performance charts. It also illustrates the low correlation of Indian markets with global markets over the past 7 years. Besides, anyone who has a bias for the home country will observe that India’s performance in the past decade has not been extraordinary vis-à-vis other countries. It has been in the bottom half in 2011, 2013, 2016 and 2019. Having a diversified portfolio can thus reduce the risk of underperformance of a particular market/geography.
Participate in the growth of MNCs: Besides technology which has been leading growth driver across the globe, some mind-blowing research and innovations are happening in the fields of Clean Energy and Healthcare such as Electric Vehicles, Artificial Intelligence, 3D Printing, Robotics, etc. Such emerging trends have a limited presence in India as it has been a laggard in such technological advancements. Further, the global companies of these sunrise sectors are not adequately listed in India. If you want to exploit this opportunity and participate in the future growth of these MNCs, then international investing makes sense.
Future requirement of foreign funds: Investing globally is a good way to meet your long-term financial goals like child’s education in a foreign country. It can provide a natural hedge to the risks in currency fluctuation. So, if you have any such financial requirement abroad and an investment horizon of at least 8-10 years, global investing options can be suitably explored.
Let us come to same caveats of International Investing:
Not just USA markets: Many investors equate international investing with the US stock markets and develop a bias towards the top FAANG stocks. As mentioned earlier, it
is prudent to diversify across geographies too. Ensure that your international portfolio covers other countries/regions too. There are various options available to invest in European and Asian markets.
Not just technology: Keep in mind that global investing is not just about Microsoft, Google, Apple, etc. Your international portfolio should be just as diversified as your domestic one in terms of sectoral representation.
Taxation: The tax treatment of international funds should be kept in mind while choosing them. These schemes are treated like debt mutual funds for the purpose of taxation. That means, if you sell them before three years, the returns would be added to your income and taxed as per the applicable income tax slab applicable to you. If you sell the investments after three years, returns would be taxed at 20% with indexation benefit.
How to invest in international markets:
There are various options available in India through which one can invest in the global markets.
Feeder funds: These invest in an identified mutual fund in the international market.
Fund of Funds: These invest in units of international mutual funds.
Domestic mutual funds: These directly invest in international stocks.
There are brokers and other platforms available in India which offer to invest directly in international stocks or exchange traded funds under Liberalised Remittance Scheme (LRS). However, these need to be evaluated from point of view of various costs like transaction, taxation and compliance costs.
Is Global Investing for small retail investors?
There are domestic equity funds who are taking 25-30 per cent exposure to international stocks. Retail investors can invest small amounts regularly in such funds to capture the benefits of global investing. Again, it should be with a long-term investment horizon. As mentioned earlier, Indian fund houses also offer feeder funds and fund-of-funds in which retail investors can park money.
HNIs who have a sizeable corpus to invest in can take direct exposure to international stocks and exchange trade funds through domestic trade platforms available.
It is important to note that the diversification will work only if global investment is at least 10-15 per cent of the entire portfolio. Taking a minuscule 3-5 per cent exposure won’t make an impact on total returns.
Look for a fund which has a broader coverage, mitigates country specific risks and is cost effective. You can consult a professional financial advisor who can guide you to construct an international portfolio which is in sync with your needs and risk appetite.