Almost a decade ago – friends and relatives in other parts of the world were positive about investing in India due to its growth prospects. India has undoubtedly delivered on that promise. However, in spite of patient investing for over a decade in India – they are overall disappointed at their experience so far. Why?
Rupee depreciation has eroded most of the gains made in the India equity markets. The rupee almost a decade ago was trading at Rs.45 per dollar is at just over Rs.70 today (~55% loss). What this means is that foreign investors who have invested patiently in India have lost over half their investments due to rupee depreciation. As long as inflation in India is higher, the dollar will depreciate over the next decade too.
While this may be bad for foreign investors – it is an opportunity for Indian investors to boost returns by investing in foreign equities or global funds. As more investors switch from merely buying and selling mutual funds to asset allocation strategies – international investing is becoming more popular. Today, a broad base of investors are investing between 5-10% of their investment portfolio in foreign funds. What are other reasons why investors should consider international funds?
1. Diversification of portfolio – International funds have low correlations with markets in India. What this means is that when markets in India go up or go down – international funds do not move in the same way. As a result, an investor can expect lower volatility of his/her portfolio value. As investors – the toughest thing is to hold on to investments for long periods. Due to wild swings in the market – most investors end up selling or churning their funds often. A combination of asset allocation, which includes international funds, has become vital for investors to get equity returns without the risk of owning equities.
2. Buying the dollar – Today, a lot of investors spend their hard-earned savings on vacations abroad and international products. Also – the number of students leaving India and going abroad has exploded over the last decade. As someone who has studied abroad – costs have increased, not marginally but have multiplied. As investors plan for their kid s education – it s essential to think about saving and goal planning in the right currency. International funds are excellent investment vehicles for buying the dollar as a currency. Investors can expect their funds return to increase in value with a fall in rupee value.
3. International investment opportunities – Most investors today buy Bata, Hero Honda, and HUL in their investment portfolios but buy Apple iPhones, Hyundai Cars, H&M clothes, Windows laptops, and Adidas Shoes. The reality is that the world is more open and simply buying Indian stocks is not enough to create wealth. International funds enable investors to participate in the world s biggest companies and brands. Even apps like Netflix, Facebook, Google, Amazon are easily available via international funds.
By choosing international index funds (most popular and effective) such as the S&P500 and NASDAQ, investors can ensure low fees while getting exposure to the best companies globally. Data shows that index funds fare better over long periods.
As the world becomes global and as Indians become more international spenders and vacationers, it’s important to diversify investments in the same way. A $1,000 smartphone is a $1,000 smartphone for an average American at all times. For an Indian, it was Rs 45,000 10 years ago; today its Rs 70,000, and tomorrow it will most probably be much more.