Diversify your portfolio by investing overseas

You may like a particular company, but you do not invest all your money in that particular stock. Going by the same logic, you need not restrict all your investments to India alone.

“Indians are under-owned in terms of foreign assets. Though our markets continue to be among the best-performing ones globally, some diversification is needed,” says Arvind Bansal, vice president & head - Multi Manager Investment, ING Investment Managers.

Why invest overseas?

One may argue, that investing overseas when most FIIs are bullish on India is going against the grain. But, there is logic behind this. “Indian markets are richly valued at the moment. We recommend a 10% exposure overseas as a part of diversification of an individual’s portfolio,” says AV Srikanth, ED, Anand Rathi Wealth Managers. Given the fact that after China, India is the second-most expensive emerging market, diversification makes sense.

Also, with the world coming out of a recession, developed markets offer better avenues of investment. Beyond price, there are other opportunities that are not accessible in India. Be it a search engine like Google or a platinum mining company like Platinum Australia or a long-term play on water resources, there are no public markets here.

How you can invest

According to RBI guidelines, individuals can invest up to $200,000 per year. So, a family of four can invest up to $800,000 or around Rs 4 crore. “One could look at future projections on how GDPs are likely to grow in different countries, as a starting point, though other variables have to be taken into consideration,” says a product manager of a private bank. Themes such as global energy, real estate and infrastructure in emerging economies are popular. The best way to tap these themes for individual investors is MFs.

Available options

You can invest either through MF route or buy directly in markets overseas. MFs available in this category operate on multiple models. The first one being actively-managed portfolios from India, where the local fund managers buy and sell stocks in foreign markets. Templeton India Equity Income is one of the oldest schemes in this segment.
The second is the fund of funds model. The Indian fund manager invests the money in various funds listed overseas and actively monitors these investments.

The third model, the most common one, is the feeder fund model and is a kind of fund of fund. Here, the Indian fund invests in a fund listed overseas. ING Latin America Fund is a classing example of a fund of fund investing in a feeder fund that invests in Latin American markets. Principal Global Opportunities Fund is one of the oldest offering here.

An investor’s decision should be model neutral. However, if you choose a fund of fund model or a feeder fund model, the costs are higher than a diversified equity fund. But it also brings in the comfort of investing in a fund with a track record.

The Indian manager taking a call on international equities is again not seen as a great option by most wealth advisors. Equity research across the globe and understanding of global markets is a rare combination and rests with few fund houses. But there is a benefit attached to funds where the fund manager invests at least 65% of the money in Indian equities and rest in foreign assets. Such funds are categorised as diversified equity funds investing in Indian equities and enjoy favourable tax treatment, such as no long-term capital gains tax and lower short-term capital gains at 15%.

However, there are some wealth managers who suggest exchange-traded fund (ETF) route to diversify overseas. Recently, Benchmark AMC listed the maiden ETF that tracks the Hang Seng Index of China on Indian bourses. “We recommend investors invest in agri commodities and oil ETF listed overseas as a part of overseas diversification,” says Partha Iyengar, founder and CEO, Accretus Solutions, a wealth advisory firm.

The speed bumps

Information remains a key input in any investment. Tracking a company is quite a task and more so if the entity is listed overseas. No wonder, wealth advisors in most cases do not advise stock specific investments. Poor understanding of global geo-political scenario is another impediment to success when you invest globally.