During the pandemic, I got used to spending more time on my phone and laptop. Some introspection time made me realize that I spend too much time apps like Instagram, Google, Netflix, Facebook, Microsoft Excel (Yes, I do spend some leisure time building valuation models).
I also took liking for food especially Kraft Cheese. Gone are the time when we were limited to consuming goods and services produced in our home country. It made me realize if I am spending so much on consuming global goods and services, can I invest in them and take share in their profits.
Understanding International Equity
International Equity is investing in equity market outside the investor’s country. Investing in companies outside India opens up lot of avenues for the investors. We can take exposure to companies and sectors which India does not offer. The tech sectors have provided phenomenal returns during the pandemic. However, past returns do not guarantee future returns
There are certain risk factors one should understand before venturing into international stocks.
Even if HSBC made 10% return in pounds, and rupee appreciated 15% against Pounds, an Indian investor will end up with net 5% loss.
There are certain political risk involves as well. A failure of government in developing country could tank your investments to zero in matter of days. New policies that does not support growth of certain sectors can adversely affect your portfolio.
Why to invest in International Equity
Growth Story
Like me, everyone is interested in taking part in valuation gain/ profit share from Amazon, Tesla, Apple, Suzuki motors, Alibaba etc. These are the companies that are driving global growth and most likely will continue to do so as we make further advancement in technology. India does not offer the exposure to tech and other sectors like E-commerce, search engines, payment infrastructure, cloud computing, electric mobility, enterprise software, and digital OTT platforms. Hopefully it will in next few years but for time being, international equities is the only way to be part of global growth.
Diversification
A better asset allocation and portfolio diversification is the key reason for venturing into international equity. International equity acts a good hedge against depreciating INR.
Currency
There are two major sources of returns from international equity. One is the performance of the individual fund and second is from currency.
Eg: Tesla provided 25% return in last 3 months. And INR deprecated approx. 20% in the same time period. An Indian Investor would have made approx. 45% in those 3 months.
Currency can move in adverse direction as well. However in long term rupee has depreciate (as shown in the chart and will continue to do so due to interest rate party.
How to Invest
Direct Investing
Direct Investing involves doing your own research and buying individual shares. There are lot of restrictions on this type of investing and is usually accessible to financially and technologically sophisticated investors. It is considered one of the most risky way to invest in global equity. Fintech start-ups in the industry have enabled buying a fraction of shares instead of the entire share (1 Berkshire Hathaway share cost around 25 Cr in INR), however I would advise to stay away from it unless you are following the markets regularly (you might have to be a night owl if you follow US markets.)
ETFs:
ETFs are passively managed funds. These are ideal for an investor who do not believe that a manger can add value by active picking up stocks. These funds are usually low cost and provide the required exposure. ETFs will replicate a certain index but due to management and trading cost involved, the expected return will be lower than the benchmark index.
Eg. Investing in NASDAQ 100 ETF.
International Mutual Funds
Retail investors have their limitations as they cannot get access to all the data on global stocks. Even if they do, they would not have manpower to analyse each and every stock in different parts of the world. An international fund manager picks up the best funds that operate locally and invest in them. They actively manage the portfolio and monitor the performance of the portfolio companies on regular basis. These funds are first choice for retails investors to access to global equity markets. We get access to expert fund managers and there is inherent diversification. You can start investment from as low as Rs 1000 per month.
Eg: An India based global tech FoF picks up the best tech funds in Europe, Asia, US and invests in them.
According to me, one can allocate up to 15 -20% in international equity depending on the investor’s risk appetite, and medium used to invest. Please take consultation from your financial advisor before investing.
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