October 4, 2019

Why should you invest out of India?

Neil Parikh

CEO, PPFAS Mutual Fund

Why should you invest out of India?

There are quite a few compelling reasons to diversify our investments beyond our own borders. It is always better to have a portfolio which has its investments spread over different geographies. The info graphic below depicts the returns earned from different countries’ stock market indexes over two different time frames. As one can see, not all markets went up or down together. The winners kept rotating and it is next to impossible to predict these movements in advance. Hence, when we invest a portion of our portfolio outside the country, we reduce the risk of our investments losing when the Indian market under-performs.

We can also reduce the “country risk” by global diversification. Most funds or portfolios help investors diversify across industries within the same country. This creates a concentration risk as all the investments are in one country. Investors can be impacted adversely in case some negative events are prevalent throughout the country. Some examples of this are- if the country is in a state of war or if there is a famine or drought like situation or if there is political turmoil etc. Having some part of the investments outside the country can help reduce this risk.

As we can see in the graphic above, all stock markets do not move at the same pace or in the same direction. Hence global diversification greatly helps reduce the portfolio volatility. Some stock markets will rise while some might fall, leading to lower fluctuations in the Net asset Value (NAV) of the portfolio. Lower volatility equals to greater peace of mind!

Lastly, global diversification provides us with a wider choice of companies to invest in. There are several world class companies which do not have Indian subsidiaries that are listed. Also, there are innovative companies making certain products/ services for which there are no Indian substitutes. When ones invest abroad, they get a chance to benefit from the performance of such global leaders.

Equity mutual fund schemes which have the freedom and ability to invest in Indian as well as overseas companies without making their investors forego the capital gains tax benefits that pure-play Indian equity schemes enjoy, could also help Financial Advisors. Such schemes would be versatile enough to help reduce portfolio clutter, without compromising on issues like volatility and returns.