Global Investing: should you pursue?
Internet has empowered the Indian Individual global investors in more ways than one. Firstly, the secular flow of information over the internet made it possible to obtain financial information efficiently and secondly the cost of investing (brokerage, commissions, etc) has been significantly reduced due to the fact that transactions are executed completely online.
Yet another factor having catalysed global investing, among Indians, has been an enabling regulatory environment, which has immensely helped in channelising the flows from India. For instance the LRS (Liberalised Remittance Scheme) allows a Resident Indian (including minors) to remit $2,50,000 annually for specified end-use like education, maintenance of family members, investing, among others.
The significance of LRS can be measured from the fact that before LRS, resident Indians required approval from RBI every time they sent money overseas. Another enabling factor has been signing up DTAA (Double Taxation Avoidance Agreement) by India with almost 90 countries, which ensures that the investor is taxed fairly, such that there is no overlap of taxation between the two jurisdictions where the investor and investments are housed.
Who should pursue global investing?
Global investing is available to anyone who wishes to pursue it. Other than the investor-friendly Regulation and Low cost, there are numerous factors which help build a strong case for investing outside of India, namely:
- INR depreciates against the USD:
Tracking INR (Indian Rupee) against the USD (US Dollar, the world’s reserve currency) over a long period of time, the INR has depreciated 4% annually. This simply implies that INR converted to USD, and invested globally, shall generate a return equivalent to the degree of INR depreciation over the period of the investment plus the return generated by such investment.
- Unique Investing proposition:
The US markets, for example, have on offer investment opportunities unavailable elsewhere like Digital businesses, Electric Vehicles, AI/ VR-driven businesses, among others.
- (Globally) Diversified portfolio
Allows the investor to participate in the 98% of the world market cap, thereby diversifying the investments across geographies with unique investment landscape.
- Risk Mitigation due to low Correlation
Correlation is a statistical measure of the degree to which two investments move in relation to each other. Negative correlation in investments ensures that losses are limited as and when prices fall in one asset, they will rise to some dgree in the other. Indian and the US markets, for instance, have low correlation between them and hence, collective exposure to them lowers the investment risk.
- Evolution of Regulation/ Technology
Over the last few years regulatory and technological aspects have evolved and have now converged, making it possible and feasible to invest in global assets, making the choice of investing globally an obvious one.
However, I believe, that none of the above stated factors, individually or collectively, make a compelling case for investing globally. In fact one reason why you should undertake global investing is that you are keen to build a ‘dollar-denominated’ portfolio, with an end-use outside of India only. For instance, you could build and utilise the dollar corpus for one or more reasons listed below:
- Asset purchase abroad
- Kids’ education abroad
- Consumption purposes (holidays, travel, etc)
- Any other end-use, outside of India
Once you have a well-defined purpose for investing globally, your approach to creating a ‘dollar corpus’, outside of India, should be well planned and executed. The basics of investing need to be adhered to, like investment goals, time horizon, risk appetite and liquidity requirements. Moreover, since the end-use of the funds is outside of India itself, there is no impact of the exchange-rate risk on such investments.
Specifically, while investing in the US equities, investing through the passively managed exchange-traded funds (ETFs) is a highly efficient way to do so. Their low cost, transparency, easy accessibility and high liquidity make them a highly viable investment option. In the developed economies, like the US, active fund managers have consistently failed to outperform the markets (benchmark indices) over long periods of time and hence passive investments have stood out and are highly efficient.
In a nutshell, investing globally is especially rewarding if you have a well-defined end-use (of the funds) abroad and if you choose to invest passively over a long period of time!
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