In recent years, innovations in financial products such as mutual funds and exchange-traded funds (ETFs), along with simplified access through online brokers, have made global investing more accessible. And investing globally can be beneficial in several ways:
Diversification – A global portfolio minimizes the possibility of a single country or region exerting outside influence on your portfolio.
Extensive Opportunities – To participate in the development of economies outside India. Large multinationals such as Apple, Microsoft and Nestle trade on US and European exchanges.
Balanced Risk- Investing in low-risk assets such as US government bonds can provide stability during recessions. Real estate or commodities provide protection against inflation.
Currency Protection- Investing globally can benefit investors, if the rupee continues to depreciate.
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There are many advantages to global investing. However, building a portfolio that is allocated across multiple countries and asset classes can seem like a daunting task. It doesn’t need to be. A well-designed portfolio with an investor’s objective and risk appetite will maximize the potential for compounding money. The following steps can help in preparing a suitable portfolio:
Define your goals: Why are you investing? What is your time horizon?
Know Your Limitations: Do you have time to do research? What is your risk taking ability?
Create a portfolio that reflects your goals and limitations.
Let’s review an example for a college savings plan managed by Voya (see table), where an investor’s goals and risk profile are translated into a globally diversified portfolio.
An investor with a long time horizon or high risk appetite may choose a higher equity allocation, while a conservative investor may choose a portfolio with a lower equity allocation.
Within equities, a specific allocation may be based on the size of the markets, in which case the largest allocation would be to US equities, followed by other developed markets and then emerging markets. High quality bonds bring stability to the portfolio, especially in a bearish environment. A major US fixed income portfolio of US government and corporate debt can provide this balance.
For a portfolio seeking price stability, short duration funds (i.e. funds investing in bonds with low maturity) will be better over the long run. Inflation-linked bonds offer investors interest rates that rise or fall with inflation. These can be attractive during periods of high inflation. High yield bonds offer higher interest rates but come with greater risk as they are typically issued by companies with lower credit quality.
Finally, alternative strategies such as commodities or real estate offer returns from sources other than stocks or bonds, but may not be suitable for all investors.
A novice investor can choose one of two paths – use a ready-made diversified portfolio like the one shown in the table. The investor simply selects a time frame or risk, and does the fund allocation. Or, select regional, sector or thematic mutual funds and ETFs to build your own portfolio.
Global portfolios can be built without having to select individual stocks or bonds. Mutual funds and ETFs that track global indexes can be used as building blocks. For example, a fund benchmarked to the S&P 500 index provides access to the largest US listed companies in a single fund. Similarly, funds can be assigned to specific regions (eg Europe, Asia), countries (eg China, Mexico), sectors (eg healthcare, industry), size (eg US large, US small), or asset class (eg bonds, commodities). provide exposure. ,
Investing globally provides access to a wide opportunity set. ETFs and MFs can provide investors with simple tools to get started. However, the most important aspect in successful investing is making a plan and sticking to it. Note that, global investments carry risks such as currency fluctuations, economic and political risks that are not found only in domestic investments. Diversification does not guarantee against loss.
Amit Sinha is the Head of Multi Asset Design at Voya Investment Management. Views expressed here are personal and for educational purpose only.