Why could Indians’ love for the domestic market be their Achilles heel?

Morningstar conducted a study across 14 markets and found that both Indian and Chinese funds had the highest weighting in the domestic market, reflecting investor preference for their domestic markets over other global markets. But in no other market was there such a difference between the weight of funds in the domestic market (see: map) and the weight of the market in the global market index as in India. Among the markets considered, India was the fifth least weighted (2%) in the Morningstar Global Equity Index.

After Indian and Chinese funds, US funds had the highest weighting in their home market at 78%, but this is also in line with the fact that the US has the largest weighting in global market indices.

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Why the bias?

Experts say that the domestic bias comes from the familiar bias of investors as well as the limited options for Indian investors. “Now investors have many options to invest in international markets,” says Swarup Mohanty, CEO, Mirae Mutual Fund.

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Compared to their weighting in global market indices (see: pie chart), funds in most countries weigh more than their domestic markets. But their domestic market weight is still low compared to India, China and the US. In the case of Germany, Italy, Singapore and Japan it is less than 30%. When it comes to New Zealand, the United Kingdom, France and Canada, it is less than 40%.

How Country Diversification Helps

“International funds can give investors exposure to global companies that have access to a large global pool of revenue,” says Radhika Gupta, Managing Director and CEO, Edelweiss MF.

It also brings currency diversification to your investments. “A US fund or other global fund will hold your investment in dollars. Therefore, when the rupee, along with other emerging market currencies, depreciates against the dollar – which averages 2.5% – you actually benefit because you are investing in this investment. on redemption,” Gupta explains. “It is a good option for investors with financial goals related to overseas expenses like children’s higher education, vacation, etc.,” she adds.

But, should one start building geographic diversification at a time when Indian markets are performing well? Market benchmark CNX NSE Nifty is the world’s fourth best performing index in terms of $50.

Morningstar director (fund research) Kaustubh Belapurkar says geographic diversification should be built into the portfolio, regardless of whether the domestic market is strong or weak.

“We have seen at different times, different geographies can do well. Hence, such investments cannot be time bound. Instead, investors should adopt an asset allocation approach, and then rebalance at regular intervals according to their target portfolio mix,” he says.

He points out that the Indian markets starting in 2014 were pretty flat before the boom. Around the same time, the US market did really well. Investor money started chasing US funds, but then, returns had already been paid in US funds. “So, the scenario changed after 2014, and then investors’ money also started running out of global funds,” says Belapurkar.

US funds again started performing well in 2019-2020 and investors started pouring money into these funds.

How Portfolio Re-balancing Works

Let’s say you have decided to keep 15% of your portfolio invested in international equities, but a decline in international funds has reduced this to 10%, while favorable conditions have increased domestic investments to 90%. Therefore, one can take advantage of some domestic exposure and transfer the proceeds to international funds; Returning to a mix of 15% international and 85% domestic.

This is how rebalancing works. You can do this at regular intervals to ensure that you are maintaining a targeted portfolio mix.

What should investors do?

Investors can build their international allocation through passive funds tracking one of two major US market indices – the S&P 500 or the Nasdaq 100. The former is preferable as it provides better regional diversification. In the case of the Nasdaq 100, US technology companies hold more than 50% of the weight.

Passively managed index funds and exchange traded funds (ETFs) remove the risk to fund managers that come with actively managed funds. Passive funds give you market benchmark returns, but active funds may underperform the market benchmark. It is not easy for domestic advisors and investors to identify global fund managers with the potential to outperform the benchmark index. If you get it wrong, the fund may underperform the benchmark index.

US market exposure is preferable for those just starting to build international exposure, as US companies have a large global presence in many geographies given their large scale and size. The US also comes with a long history of capital markets and is a well regulated market.

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