Market levels where they are, if you are feeling nervous, the practical approach is to diversify apart from investing for the long term. Diversification is in asset categories, i.e. Equity, Debt, Gold, etc. Furthermore, this can happen across geographies, as the risk profile of the markets is different, the correlation between the two markets is less and this effectively diversifies your risks. With the spread of technology and fund innovation, there are more options for investors nowadays. In terms of the spread of your investment portfolio, we will discuss the US market, as it is the global leader in market cap. For a perspective, India being a growth economy, the majority of your portfolio should be in India. Then what is the point of investing in the US market? The reasons are threefold.
Diversifying the risk and returns of your portfolio: Rather than being concentrated only in India, as in global stocks, markets are subject to slightly different parameters and the correlation is low.
Benefit from Global Fund Flows: The growth of the Indian market, until recently, has been driven more by domestic investors than by foreign portfolio investors. This strengthens our market. You can also benefit from global fund flows.
INR Depreciation: Through the Mutual Fund route, when you are investing in Indian Rupees, your money is invested in US Dollars in stocks abroad. When you redeem, assuming the INR depreciates, which is likely, you get a higher converted value. This is over and above your returns from the fund depending on market movements.
your investment avenues
Mutual funds are a convenient way to take exposure instead of buying stocks directly. Within the mutual fund schemes that facilitate your investment abroad, there are several formats.
Funds of Funds (FOFs) are funds that invest in one or more funds, thus providing the underlying funds to the investor of the FOF.
There are Exchange Traded Funds (ETFs) which are listed on stock exchanges in India, i.e. NSE/BSE, which invest in stocks abroad. To invest in ETFs, you need a demat account and trading account with a stockbroker.
There are index funds available in India that invest in stocks abroad. These are referred to as index funds because the named index is followed and the fund manager does not take any active decisions in fund management.
For clarity, ETFs also follow a specified index, but are referred to as ETFs because your liquidity—your buying and selling—is only on a stock exchange, not with mutual funds. Index funds are better in this sense as you can buy/sell with mutual funds. For index funds, you are not dependent on the extent of liquidity available in the stock exchange. Index funds and ETFs are both classified as passive funds.
To illustrate the portfolio structure of international funds, let us take an index fund. ICICI Prudential has come up with a new Fund Offer (NFO) of Nasdaq 100 Index Fund. It would replicate the Nasdaq 100 index stocks. The top five components of this index are Apple (11.3%), Microsoft (10%), Amazon (7.6%), Alphabet (Google) (4%) and Facebook (4%). Sector-wise, information technology comprises 44% of the Nasdaq 100, communications 29% and consumer discretionary 15%.
Past record is not relevant to your fund selection, especially passively managed international funds; It is about repeating the index and the returns from the stocks in the index over the long term. Volatility can be in any market, India or US or any country. Although globally market sentiments are intertwined as information flows quickly, history shows that returns differ. If we plan the year-wise returns from different markets like US, India, European countries, China, Japan, etc., it shows that each year, the returns vary significantly. And it effectively diversifies your portfolio. You have to decide your allocation for equity and debt, and within equities, for Indian and global.
One thing to note is that global funds are taxed as debt, even if the underlying investments are in equities. Anyway your investment should be for the long term; Over the holding period of three years, you get the benefit of indexation. The concept of indexation is that while computing the long-term capital gains tax on your debt fund investments, you get inflation linked gains. To the extent permitted by the tax authority, your purchase cost is indexed or marked down, and you only pay tax on the net difference. This significantly reduces your tax payable.
Joydeep Sen is a corporate trainer and author.
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