Investing in Global Markets for Diversified Portfolio
In this episode of Dhan ki Baat, Prashasta Seth, Chief Investment Officer, IIFL Asset Management Ltd, discusses the process of Investing Outside India and how it is a worthy option to diversify your portfolio.
Why you should Invest Outside India
Diversification is one of the most vital tenets of investing. The central idea is to have your capital spread across different industries and/or financial products to protect your corpus from a single loss. One of the primary reasons that your investments go bad is the negative state of the stock market or a poor performing domestic economy. But if you also have investments outside India,you mitigate your losses if the Indian stock market collapses. Investing money abroad is one of the innovative strategies you can employ for the protection of your investments through diversification.
How to Invest Outside India?
Before 2004, investments outside India were not allowed. However, in 2004, the RBI announced the Liberalized Remittance Scheme (LRS) for Indians to invest abroad. Under this scheme, an investor is allowed to remit $250,000 per financial year, which can be done through shares, property or other assets.
Why should you invest outside India?
Investing outside India has proven to be the key factor in diversifying your investments.Historically, the risk factors associated with investments outside India are less as compared to the Indian stock market. Further, global equities and bonds have a low correlation to Indian equities as shown in the table below:
| Correlation Coefficient | Nifty |
|---|---|
| Global Equities | 0.434 |
| Global Bonds | -0.474 |
This means that the volatility of the Indian stock market would not affect global markets to such an extent. Lesser volatility implies more safety.
Investment opportunities
Equities: Tech Stocks
If you are looking to invest outside India in tech stocks, you can consider investing in technology giants such as Facebook, Apple, Amazon, Google, Microsoft etc. Being the biggest publicly traded companies in the world, these companies have provided investors with consistent and good returns.
| Returns | 5 Years | 10 Years |
|---|---|---|
| MSCI USA Information Technology Index | 22.1% | 14.5% |
| Nifty 50 Index (USD) | 10.6% | 3.4% |
Equities: Emerging Markets
Investors can also invest in markets of many other emerging markets like China, Brazil,Indonesia, Russia, Taiwan etc. Some of these markets are trading at cheap valuation (as low as PE-12.5x).
| Returns | 1 Years | 3 Years |
|---|---|---|
| SPDR Portfolio Emerging Markets ETF | 28.10% | 8.17% |
| Nifty 50 Index (USD) | 22.70% | 5.24% |
Fixed Income Markets
Fixed income includes different type of bonds such as investment grade bonds, high yield bonds, treasury bonds, convertible bonds etc. A large number of Indian companies, including various government-owned banks, have issued INR-denominated bonds outside India, called Masala Bonds, which provide another option to invest outside India.
| 1 Years | 3 Years | 5 Years | 7 Years | 10 Years | |
|---|---|---|---|---|---|
| Bloomberg Barclays Global High Yield Bonds Index | 6.87% | 6.46% | 5.39% | 6.63% | 8.23% |
| Bloomberg Barclays US Convertible Liquid Bond Index | 14.45% | 8.92% | 11.19% | 8.96% | 7.69% |
New Asset Classes: REITs
REITs make an interesting part of your diversified portfolio. These are a combination of various properties, which are monitored and managed by fund managers or professionals. REITs work by investors pooling in money, buying property and earning returns through rent or profit on sale of property. As an investment avenue, REITs have shown strong returns in the past and have low correlation with other asset classes.
| Returns | 1 Years | 3 Years | 5 Years | 7 Years |
|---|---|---|---|---|
| Global REITs | 7.98% | 4.98% | 8.62% | 9.88% |
Risks Involved
Each investment avenue, whether fixed-income (debt), equity or REIT (real estate) comes with its own risks:
Fixed Income Funds
Credit Risk
Interest Rate Risk
Liquidity Risk
Concentration Risk
Borrowing Risk
Risk of change in Leverage Term
Counterparty Risk
Market Risk
Equity Funds
Emerging Market Risk
Geographic Focus Risk
Equity Investing Risk
Index Tracking Risk
Liquidity Risk
Market Risk
Currency Risk
Valuation Risk
REITs Funds
Market Risk
Income Risk
Concentration Risk
Liquidity Risk
Borrowing Risk
Refinancing Risk
Other Risks: Sector or Country Regulation Risk
Speaker's Profile
Prashasta Seth
Mr. Prashasta Seth is the Chief Investment Officer, IIFL Asset Management Ltd. Prashasta is currently responsible for all the equity funds managed by IIFL AMC Ltd. He has been with IIFL since 2008 and has been instrumental in setting up and growing the equity desk at IIFL Investment Managers. Prashasta has over 16 years of experience in the financial services industry. Mr. Seth has been managing and advising pooled assets and client portfolios specifically focusing on developing investment strategies, generating stock ideas and creating actionable research reports. His previous assignments include a stint in J.P. Morgan, London and heading Irevna (a Standard & Poor’s company). Prashasta is a PGDBM from IIM Ahmedabad and a B Tech from IIT Kanpur.
FAQs
Am I eligible to invest outside India?
Although investing outside wasn’t permitted earlier, it is now permitted under the Liberalized Remittance Scheme. You are allowed to invest outside India for permitted capital or current accounts, or a combination of both. To invest funds outside India, you must be a resident of India.
How much and in what products can I invest my money outside India?
You can invest up to $2,50,000 per year in shares, property or other assets. Remittance is also allowed for educational, travelling and medical purposes or gifting and donations.
Is it safe to invest in markets of other countries?
Yes, investing outside India is a great option to diversify your portfolio. The investment is safe as the correlation of global equities and bonds is low to Indian equities, depending on the trend of the country's financial market.
Who is an authorized dealer?
To invest outside India, you will need an authorized dealer to verify your transactions. An authorized dealer is an entity that is specifically authorized by the RBI to deal with foreign exchange and other foreign transactions. Usually, banks work as ADs in India.
What are the documents required by the remitter to invest outside India?
The resident individual investing outside India is required to assign a branch that is authorized as an AD by the RBI to look over all the transactions made. The resident is required to furnish an A2 Form to be eligible to purchase foreign exchange under the LRS scheme. A PAN card is also needed to verify your identity to the AD.
Can I open a bank account outside India for maintaining my investments outside India?
Yes, you can open a foreign currency account with any bank you want outside India without any prior approval of RBI. You can use this account for all transactions you make under the LRS.
Can entities other than an Indian citizen invest outside India under the LRS?
No, entities other than an Indian citizen like companies, HUF etc. are not allowed to invest under the LRS. Only an individual can invest outside India for personal gains. If a company or a HUF wishes to invest outside India, they have to make the investment through Overseas Direct Investment.
What are the best products to invest my money outside India?
You can consider investing in equities such as tech stocks of big companies or equities of emerging markets like China, Taiwan etc. You can also invest in Fixed Income options like bonds or treasury bills or new asset classes like REITs that provide good returns.
Can a minor invest outside India under the LRS?
Yes, under the LRS, a minor can also invest outside India. In case the remitter is a minor, the minor's natural guardians must countersign the A2 form. The A2 form is a document under the LRS, which an investor has to sign to be eligible to remit funds overseas. In case of minors, the natural guardians are responsible for all the transactions until the minor reaches the legal age.
What are the risks involved in investing outside India?
Risks associated with investments outside India can be market risk, credit risk, leverage risk, liquidity risk, interest rate risk etc. These risks are dependent on the current market scenario of the respective countries.
