One of the key pillars of building a stable yet strong investment portfolio for your long-term goals is Diversification. The objective of diversification is simply to “not put all your eggs in one basket”. Ie. apportion your money across different investments, in order to reduce risk. Conventionally, diversification for retail investors has meant the following –
- Invest across asset classes – eg. Equity, Debt, Gold, Commodities, Real Estate
- Invest across categories – eg. within Equity – large/mid/small cap, within debt – liquid, duration, credit risk
One key area available for diversification, yet, not taken advantage of by the retail investor is – Geography. Think about it – while we all agree that as a country India has a great long-term future and is one of the fastest growing markets in the world, from a risk perspective, having all your investments in one country – isn’t it another way of “having all your eggs in one basket”? While during happier times your pure Indian portfolio might grow healthily, what about the volatility risks during uncertain times (eg. global recessions, oil prices peaking – haven’t we seen these before?) when global money flows out of emerging markets such as India?
One key factor that large and HNI investors use successfully to not only de-risk their portfolios but also take advantage of global growth cycles is investing internationally. This has many advantages
- Companies such as Apple, Google, Amazon, Facebook, Netflix – are driving huge behavior and consumption changes across consumers. And none of these are Indian. Investing internationally means having a finger in this pie.
- Most clients we meet today have a significant portion of their goals planned abroad. Eg. Children’s foreign education, International holidays every few years both before and after retirement, destination weddings abroad. Investing internationally helps you plan for these goals better.
- While India is a higher-growth market, it is also a higher inflation country, and hence its currency depreciates against most developed country currencies eg. Dollar, Euro, GBP. Investing abroad allows you to take advantage of the rupee depreciating and adds to the gains.
Remember though, investing internationally also has its share of “new” risks that one needs to plan for. Eg. knowledge of global cycles, international geo-politics and its impact as well as currency risks. That said, there are significant investment opportunities available today that helps us invest internationally. More importantly, not investing internationally may be a bigger risk over the long term, keeping in mind the increasing inter-connectedness the world is moving towards.
It is also not something that a retail investor can DIY. It is important to reach out to a trusted financial advisor who can help you sift through and find these opportunities. For our clients, who have anywhere between 10-25 years left for retirement, we recommend at least 10-20% of their investment portfolio should be invested abroad, both to take advantage of global investment opportunities as well as act as a hedge during volatile times.
Going on international holidays or spending on international products – a good part of your expenses goes towards international companies. Then, why haven’t you invested a decent part of your inve/stments in them yet?
Finwise is a personal finance solutions firm that helps both residents and NRIs plan for their financial goals, follow their passions and achieve financial independence. For consultations, please reach us at email@example.com or +91 9870702277/9820818007.