Di­ver­sify port­fo­lio by in­vest­ing off­shore

Low cor­re­la­tion means you can re­duce volatil­ity by tak­ing ex­po­sure in other mar­kets

Business Standard - - YOUR MONEY - DEVANG KAKKAD The writer is head of re­search at Equirus Wealth Man­age­ment

When speak­ing on our Ap­ple or Sam­sung smart­phone, or us­ing web sites like Google and Face­book, most of us have at one point or the other won­dered if we can own the stocks of these mar­quee com­pa­nies.

High net worth in­di­vid­u­als in par­tic­u­lar need to in­vest in off-shore mar­kets to cre­ate a well-di­ver­si­fied port­fo­lio.

Low cor­re­la­tion: Port­fo­lios of most In­dian in­vestors are not ad­e­quately di­ver­si­fied ge­o­graph­i­cally. What makes a global al­lo­ca­tion es­sen­tial for eq­uity in­vestors is the low cor­re­la­tion be­tween dif­fer­ent mar­kets. The re­turns anal­y­sis of ma­jor in­dices over the past nine years demon­strates that there is limited cor­re­la­tion be­tween eq­uity mar­kets ( see ta­ble). In cal­en­dar year 2018, the Nifty had given a pos­i­tive re­turn of 6 per cent, whereas re­turns from all the other ma­jor in­dices were neg­a­tive. In cal­en­dar year 2013, the sit­u­a­tion was quite dif­fer­ent. That year the US S&P 500 In­dex had given a block­buster re­turn of 30 per cent, while the Nifty had given much lower gains of 9 per cent. By di­ver­si­fy­ing into off­shore mar­kets, In­dian in­vestors can make the re­turns from their port­fo­lios less volatile. In the years when the In­dian mar­ket does not do well, for­eign mar­kets can pro­vide down­side pro­tec­tion to the port­fo­lio.

Mas­sive op­por­tu­ni­ties: Apart from the is­sue of re­turns, one also needs to con­sider in­vest­ing in­ter­na­tion­ally be­cause of the sheer size of the op­por­tu­nity avail­able. Cur­rently, In­dia’s eq­uity mar­ket cap­i­tal­i­sa­tion is barely 3 per cent of the world eq­uity mar­ket and it ranks seventh in size. The US mar­ket, on the other hand, ac­counts for 38.7 per cent of global eq­uity mar­ket cap­i­tal­i­sa­tion. Fo­ray­ing abroad will give In­dian in­vestors the op­por­tu­nity to in­vest in the stocks of a large num­ber of multi­na­tional gi­ants. Many global names such as Ap­ple, Ama­zon, Al­pha­bet, Alibaba, Face­book, Net­flix, Sam­sung, Wal­mart and oth­ers res­onate with In­dian in­vestors.

Cur­rency hedge: In­vest­ing in off­shore prod­ucts is also ben­e­fi­cial for in­di­vid­u­als and fam­i­lies that ex­pect large ex­pen­di­tures over­seas in the fu­ture by pro­vid­ing a cur­rency hedge. As we have ob­served in the past, cur­rency de­pre­ci­a­tion is never lin­ear. The cur­rency stays sta­ble for a while and then de­pre­ci­ates sharply. Fam­i­lies that plan to send their chil­dren over­seas for ed­u­ca­tion, or those that plan to buy a house abroad, need to safe­guard their in­vest­ments against cur­rency de­pre­ci­a­tion. Ow­ing to the steep cur­rency de­pre­ci­a­tion re­cently, many fam­i­lies were forced to shell out more than they had an­tic­i­pated. One way fam­i­lies can safe­guard them­selves against this risk is by in­vest­ing at least a part of their port­fo­lio in off­shore prod­ucts. This will limit the im­pact of cur­rency de­pre­ci­a­tion.

Over the past nine years, the ru­pee has de­pre­ci­ated from ~46.53 per dol­lar at the start of 2010 to ~69.77 per dol­lar at the end of 2018. While the ab­so­lute de­pre­ci­a­tion is ap­prox­i­mately 50 per cent, aver­age per year de­pre­ci­a­tion is ap­prox­i­mately 5.7 per cent. Thus, cur­rency de­pre­ci­a­tion is a very im­por­tant rea­son why one needs to in­clude off­shore prod­ucts in the port­fo­lio.

Next, let us turn to the op­tions avail­able to In­dian in­vestors for in­vest­ing in over­seas mar­kets. Two routes are avail­able: the first is to in­vest in ru­pee-de­nom­i­nated off­shore mu­tual funds avail­able in In­dia, and the sec­ond is to avail of the Lib­er­alised Re­mit­tance Scheme (LRS) and in­vest di­rectly in over­seas mar­kets.

In­ter­na­tional funds: Off­shore funds are mu­tual fund schemes that in­vest in global eq­uity mar­kets. Many of these funds are coun­try or re­gion spe­cific, while oth­ers are the­matic or sec­tor spe­cific. Off­shore funds may in­vest ei­ther di­rectly or in­di­rectly in global eq­uity mar­kets.

One cat­e­gory of off­shore mu­tual funds in­vests di­rectly in global eq­uity mar­kets. These funds are man­aged by an ac­tive fund man­age­ment team do­mes­ti­cally. Then there are the feeder funds, which pool funds from do­mes­tic in­vestors and then in­vest the cor­pus in ei­ther a par­ent com­pany’s off­shore fund or in a bas­ket of off­shore mu­tual funds (in which case they are re­ferred to as fund of funds). These funds are ac­tively man­aged by an off­shore fund man­age­ment team. The third cat­e­gory con­sists of global funds, which have the man­date to in­vest in both do­mes­tic and in­ter­na­tional mar­kets. These funds fo­cus prim ar­ily on the do­mes­tic mar­kets and pro­vide limited ex­po­sure to for­eign eq­ui­ties.

LRS route: High and ul­tra high net worth in­vestors can also con­sider en­gag­ing with an over­seas wealth ad­vi­sor. They can avail of the Lib­er­alised Re­mit­tance Scheme (LRS) to re­mit funds abroad and in­vest in over­seas cap­i­tal mar­kets di­rectly. Ac­cord­ing to RBI guide­lines, in­di­vid­u­als in­clud­ing mi­nors can re­mit up to $250,000 a year. The re­mit­tances can be made in any freely con­vert­ible for­eign cur­rency. There are also no re­stric­tions on the fre­quency of re­mit­tances un­der LRS.

Fi­nally, in­vestors who have in­vested ad­e­quately in var­i­ous seg­ments of the In­dian stock mar­ket should con­sider al­lo­cat­ing 10-20 per cent of their eq­uity port­fo­lio to off­shore cap­i­tal mar­kets.

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