ETMarkets Smart Talk | Direct stocks are not the answer for global investing; fund of funds makes more sense: Rahul Jain

Global investing is becoming an increasingly important part of an Indian investor’s portfolio, but choosing the right way to access international markets can be a challenge. Should investors pick individual global stocks, use ETFs, or opt for a fund of funds?

According to Rahul Jain, President & Head – Wealth Management at Nuvama, direct stock-picking is not the answer for most investors looking to diversify globally. He believes passive strategies and fund of funds can offer a more effective way to gain exposure to different geographies while reducing the burden of taking individual country and stock calls.

Jain recommends that investors look at international equities as part of their overall equity allocation rather than treating them as a completely separate asset class. He also suggests an 85:15 split between domestic and international equities within the equity portfolio.


With global markets being driven by multiple factors—from AI and technology to changing interest-rate cycles and geopolitical developments—predicting which geography or theme will outperform can be extremely difficult.

So, should Indian investors take the DIY route when investing overseas? How much international exposure should they have, and why does Jain believe a fund-of-funds approach makes more sense?

In this episode of ETMarkets Smart Talk, we speak to Rahul Jain about global investing, portfolio diversification and how investors can build international exposure without taking unnecessary risks. Edited Excerpts -

Kshitij Anand: Let me understand from you: there are so many products right now, be it PMS, AIF, structured credit. Has wealth creation become easier or more complicated because of some of these instruments that we have?
Rahul Jain: I think that is a very valid question. Both situations have their own pros and cons, and I think your question only highlights that.

So, having different categories of products across different asset classes has enabled a lot of diversification for clients and also allowed them to participate in newer ideas like performing credit, REITs, InvITs, special situations. Infra is something which has come up in the last three-four years.

And just as an example, this is largely in the fixed-income asset class. Earlier, for fixed income, there were only bonds and FDs, but now there is a larger basket available. So, from a client’s point of view, it increases the opportunity to increase returns in a similar bucket.

But on the other hand, if you are not using a portfolio approach but just accumulating products, then it can become very complicated from a wealth creation point of view because every product might be under a particular asset class.

For example, REITs and InvITs, for me, are in the bucket of fixed income. Performing credit is also in the bucket of fixed income. Special situations are also in the bucket of fixed income, and infra is also in the bucket of fixed income.

But if I keep accumulating a lot of these with different nuances because everyone has different risk connotations and different returns, then life can become complex.

So, if you use a portfolio approach and then bucket them properly, they will work well. But I also agree to a point that too many product categories, too much diversification, can increase complexity for you significantly unless and until you understand them.

So, I would agree partly with your question but also disagree that while it has created complexity, it has also opened up a lot of opportunities for clients or investors.

Kshitij Anand: In fact, from that perspective, the role of an advisor has also changed, probably from portfolio distribution to more of portfolio architecture, just to make sure that everything is aligned in the proper way. How are you viewing that?
Rahul Jain: Just taking a cue from your first question, as a portfolio manager or while managing a portfolio of a client, my aim is two-fold. One is, at his current risk profile, how can I generate extra alpha?

The other is, how can I reduce his risk without compromising on his returns? These are two of my large objectives for the portfolio.

The third objective is to create consistency in the portfolio or drive consistency in the portfolio because then, if the consistency is there, the compounding of wealth can happen.

So, for me, using this portfolio approach and using different product categories under the same asset class can allow me to either generate extra alpha or reduce risk and then also create compounding for you over a period of time.

For example, I will give you one example, like REITs and InvITs, which I personally like a lot these days. Recently, also, a couple of days back, the taxation on dividends from REITs and InvITs was exempted by the government from a taxation point of view.

Now, according to me, REITs and InvITs can generate 12% to 14% returns with significantly lower risk versus large-cap equity, hypothetically.

So, for me, if some part can be converted there, it increases my client's portfolio durability because the risk has reduced, but the return remains the same.

So, for me, as a wealth manager, the aim is to put ideas under different asset classes where either I generate alpha with the current risk profile or I reduce risk without compromising on returns.

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Kshitij Anand: Is diversification today being misunderstood? Many investors own 20-30 products but still end up taking concentrated risks.
Rahul Jain: So again, I would say that if you see the core philosophy that we advise on, it is asset allocation. Asset allocation means a combination of your portfolio comprising equity, debt, and a sub-hedge, which is gold. Why do we do this?

Because every client we speak to, we have seen over a period of time, has a need for growth and annuity. Growth is delivered by equities, annuity is delivered by fixed income, and gold comes as a natural hedge. When nothing works, gold works.

In the last Iran-US crisis, that is also not happening, so it is becoming less correlated. But I am saying it is short term; over a longer period, it will. That is our understanding.

So, I am suggesting diversification for sure. So, this works. Misunderstanding & diversification, I also agree. So, too many product categories, again, just adding, adding, adding, adding, is over-diversification, which can create complexity and chaos.

Complexity and chaos in what? If I build a portfolio, the first is building up the portfolio, the second is reviewing it, and then taking actions accordingly.

During the review, we assess whether the objectives we had set for the portfolio and its various products are being achieved or not. If they are not being achieved, then we need to evaluate whether it is time to get rid of that particular investment.

Reviewing, getting rid of and adding is also a very important part, which gets compromised if your portfolio becomes over-diversified and your ability to monitor goes down.

If your monitoring ability goes down, your control goes down, and your ability to reshuffle and realign goes down, which again is a very important part.

According to me, selecting a good portfolio is just 30% of the work. The other 70% is reviewing and monitoring and taking the necessary actions consistently, which is also very important and gets compromised.

So, diversification works 30%, but the rest of the part is also important. If you make it too diversified, it will make the 70% part of the work more complex, so that is also very essential.

Kshitij Anand: How should investors think about portfolio construction in an environment where correlations between asset classes are constantly changing?
Rahul Jain: So, I agree with you, and I do not disagree with the fact. See, gold was not doing well when the whole Iran-US war happened.

So, now the nuances are there that some of the Middle East treasuries might be selling it. This got challenged right now, and I agree that a lot of things might have become non-correlated effectively, but I am actually not worried too much about the same.

I would say that there might be disruption in the short term in these behaviours, but in the medium to long term, again, it will get realigned. That is our core hypothesis and assumption, and you have to watch out for some more time to finally gain, but that is the understanding.

But according to me, one thing is very clear: in the medium term, all asset classes will not move in one direction. So, if that hypothesis stays intact, then diversification will always work.

For me, diversification has two purposes. One is, it allows you to control your risk, and secondly, it allows you to behave emotionally in a better way. That is another important part.

So, how I explain this is that if you have a portfolio which is equity, debt and gold, we all believe that when markets fall, you should always buy. History has shown that.

COVID, the Iran-US war—it went down, it came up. So, when markets are in panic, you should buy. That is always a contrarian trade, but it always works.

Now, suppose hypothetically, if you are 100% equity, when markets go down, my view is that mostly you will not buy because you are already fully invested in equity.

You will be thinking, ki arre galti kari, mere ko pehle bech dena chahiye tha. Your friends will also come and tell you, arre, markets are looking very bad. The wealth manager might also say that, arre, it is not looking very optimistic now.

Now, this is one situation. Given the other situation, if you have 50% debt and 50% equity, and if the market goes down, the probability of you converting some part of debt to equity is still higher. You might still not do it, but it is still higher.

So, for me, diversification also allows you to take more balanced decisions in the markets because, according to me, that is also very important to generate wealth and create compounding.

So, diversification allows one part—or I would say, what you said—allows one part of that hypothesis that everything will not work in the same way. History has shown that. And secondly, it also creates emotional balance, which is important.

So, I think that is our underlying theme, which will continue.

How do I think about asset allocation right now? The formula is that 100 minus your age should be your equity; the balance can be… But for more simplification, I would say 50% debt and 50% equity is not a bad option. So, 50% debt, 40% equity and 5-10% gold can be an option.

So, I would say that, first, simply, you can do it like this. Otherwise, you can use the age formula. I would again say that this is still 30%. Continuing with this philosophy for the long term is the larger part of the game.

Kshitij Anand: Given today's market environment, how would you broadly allocate across equities, debt, gold and alternative assets for a long-term investor?
Rahul Jain: So, international equity investing is now becoming more and more relevant, undoubtedly, because the way Korean markets and US markets have performed in the last two-three years versus what has happened with domestic equities is a clear example. So, it makes a lot of sense.

Coming back to your point, I would say that I will divide right now into equities as one bucket, fixed income as the second bucket, and the third bucket would be gold. International equities can be part of the equity portfolio. I will not make it a different segregation because the risks are similar, while returns can be different.

So, according to me, right now, in your equity portfolio, I would start with equity at 40% in total, 50-55% debt, and 5% gold. In the equity portfolio, I will divide it 85-15: 85% domestic and 15% international.

And I would say that over the next 12-18 months, I feel that equity might be volatile. There will be good opportunities where you can increase your 40% allocation to equities to 50-55% in the next 12-18 months, where you can flip debt to equity. That is what the strategy is.

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Kshitij Anand: What role should international investing play in Indian portfolios today, especially after periods of outperformance by Indian equities?
Rahul Jain: No, so I would say direct stocks are not the answer. That is one thing which I can tell you very clearly. Whether it is direct equities in India or outside, I do not favour them. I favour passives as a far better way.

Since here again, there are multiple ETFs. There are emerging markets, then there is US tech, then there can be the whole US effectively, developed countries, etc., China. So, there are multiple options available.

According to me, in this scenario, fund of funds makes the most sense, largely because you get the complete flavour of the globe. At the end of the day, the complete flavour of the globe allows you to have one thing very clear: you are not taking any undue risk.

The fewer calls you take on your own and let those calls be taken by the fund manager, who is more able to do it, the better it is. It reduces your job, reduces your headache, and reduces the conversation in your mind every time about whether you did this right or did that wrong.

Sab mein ek aap ka acha equity ka portfolio ban jaiyega globally. Abhi kya chlega, kya nahi chalega, you can predict, but prediction is difficult in equities.

There are a lot of moving parts right now at the same point in time, whether AI will do well, not do well, ho gaya hai ki khatam ho gaya hai, whether the bubble is still there.

So, I am saying, let the fund manager answer all these questions and you do a fund of funds. Then you have a diversified portfolio, decent and kuch chalega, kuch nahi chalega, but overall, the return will be decent. That is what our thinking is.

So, I think that is how someone should… Taking stock calls, again, according to me, is a difficult one because then you have to do a lot of research. You cannot just intuitively say that ki yeh 7 buy kar lete hai, 5 buy kar lete hai, 3 logo ne bola hai isliye buy kar lete hai, usmein kafi problem... Mereko lagta hai ki usmein chances are less in terms of generating returns. If you have expertise in your own field, then you can do it.

Kshitij Anand: As wealth management evolves, what will distinguish a great advisor from an average one over the next five years?
Rahul Jain: Yes, that is a very interesting point. We are also thinking about this a lot. So, a couple of things on this.

In our part of wealth management, there are two important stakeholders. One is the end consumer, and the second is our wealth managers.

So, from the investment consumer’s point of view, AI gives them significant power. By significant power, I mean that if you put your portfolio through AI, it can clearly tell you whether it is working or not working.

So, he will also realise and understand which advisor is creating real value for him. It will be very clear. So, this is significant power in people's hands.

For example, 10 years back, when the internet happened, it allowed people to take calls on their own. The information arbitrage that was there just got reduced. Now, the intelligence arbitrage is also getting reduced effectively, so that is one.

So, I am saying when I meet clients, clients have started using it. We see it happening. Adoption is there.

Kshitij Anand: I am sure a lot of cross-questioning might also be happening.
Rahul Jain: Haan, 100% hoti hai. And apart from that, if a client is hypothetically a 60-year-old and his son is now taking up all the investments, he is surely using it. So, he gets powered a lot.

From a wealth manager’s point of view also, it is very complimentary. If he uses it well and leverages it well, it becomes significantly important because the financial world of investments, which comprises portfolios—you just had your first question that so many products, is it making life complex? So, while it is making life complex for the client, it is making life complex for RMs also.

Everyone is differently nuanced. Kisi ka kuch hai, kisi ki risk appetite kuch hai, kisi mein kuch strategies etc. AI will help them to have a better understanding in real time, which can give a lot of insights to them to speak to clients. That is one.

Second is that a seasoned banker with over 10 years of experience and a two-year-old banker always had an arbitrage of knowledge because the 10-year-old banker gained it through his experiences with clients. Now, that arbitrage is also going away.

Wo system ko use karke kafi kuch smartly pehle kar sakta hai jo pehle bahut time lagta tha. Toh dekha jaiye toh dono jaghaon ko kafi leverage aur help hai.

It also makes it clear that now, as a wealth manager, you have to advise and think more about devising things smartly and thoughtfully, and I think that will become important.

AI, in that sense, will be a win-win for both the consumer as well as the wealth manager.

Kshitij Anand: And also, finally, in portfolio management, we do rebalancing. So, how exactly, or how frequently, should that be done? Because again, a lot of investors know rebalancing is important, but I am sure they do not get to a point where they are really willing to do that because nobody likes change.
Rahul Jain: That is true.

Kshitij Anand: So, I am sure this is something which you have to also fight it out—that no, no, wo keh rahe hai chal raha hai, chalne do, koi baat nahi.
Rahul Jain: Haan, wo bolte hai chalne do, aap kuch naya batao. Yeh ek bada common conversation, aap kuch naya batao.

Kshitij Anand: Haan, wo rakha hua hai, investment kara hua hai, but you know where you are coming from and why you are advising the client to, let us say, move away from Product A to, let us say, Product B. But then there is so much resistance inside them that they really do not want to go ahead with it. How are you dealing with that?
Rahul Jain: So, mujhe lagta hai ki rebalancing se pehle ek aur bhi cheez hai, wo hai portfolio review. Toh agar aap har 6 mahine mein portfolio review karo toh 2-3 reviews baad client will start building a rhythm, and then he will start getting comfortable with rebalancing because his objectives and the portfolio objectives will start matching.

So, the discipline of conducting a portfolio review allows you to rebalance at the right point in time.

So, my sense is ki har 6 mahine mein portfolio review karna chahiye aur har 12 mahine rebalance karna chahiye aur karne ke liye nahi karna chahiye, zarurat hai toh karna chahiye, otherwise nahi karna chahiye.

Kshitij Anand: And your advice to Gen Z, who have just started working, what would you advise them?
Rahul Jain: So, from an investment lens, I would surely advise them ki the practice and discipline of asset allocation is a good one, according to me, and they should start early.

A lot of people say that you should start early in equities, which I do not disagree with. I completely agree, but the discipline of building a good philosophy from a future point of view, which can run for the next 25, 35 or 40 years of your investing, and this philosophy, this way of operating from an investment point of view, is evergreen and works every time. Good markets, bad markets, ugly markets, crisis markets—it works every time.

So, it is good to start building it right now. Just as meditation and exercise are both important for good health, you cannot say that you will start meditating in old age and exercise when you are young, because it becomes very difficult to do so. It is better to start both together. The same applies to asset allocation. So, you should invest in equities as well—I am not saying you should not—but you should also follow the discipline of asset allocation.