As Indians, we live a life surrounded by international brands. Our way of living has accommodated foreign products that range from watching our favorite shows on Netflix to ordering everything online from Amazon. Many of such companies that we depend on are not listed in the Indian Stock Exchange market. However, when it comes to investments, 99% of the Indians show a preference for Indian equities. This is called home bias. Home bias is the inclination of investors to invest a majority of their portfolios in domestic equities.
Just take a look around yourself and notice all the items that are used in the day-to-day activities, you will be astonished to know that most of these items aren’t made in India. From the cars you drive, to the foods you eat, to the content you see, most of them have their bases in other nations. Apple which is a company famous for its Mobile are a country based in US, Cadbury which has become synonymous for Chocolates in India has its home base in the United Kingdom’s and One Plus which emerged as a famous mobile brand has an overseas base in China. Where lies the problem?
The unidentified problem is that this home bias may stop us from reaping the benefits of prospects in first-world and other third-world markets. Indian investors are ignoring the benefits of diversifying into foreign equities and are averse to external markets owing to such a bias. Did you know that India accounts for only 3% of the entire global market capitalization. This means that 99% of the people investing in Indian stocks are missing 97% market capital that the world has to offer. The main problem with limiting yourself to only domestic markets increase your portfolio’s concentration risk of investing in just one economy. This inherently applies that if you as an investor are only investing in Indian Domestic markets you are only investing in a small part of the whole investing game.
What stops the Investors from investing Globally:
One of the major hindrances in global investing is having a “Home Bias”. A home bias implies that individuals prefer their domestic economies as a preferred place to park their funds based on the assumption that firstly, they know their economy better and secondly due to nationalism. While the informational world is becoming flatter by the day, the attainment of relevant and important information has never been easier, and while it comes to finances, they know no nationality. So, it becomes prudent in such scenarios to inspect the wagon of global investing and ride it to attain stability, exposure and profitable returns, before it gets too late.
Why Should You Invest In Global Markets?
When it comes to the investment front in the Indian Economy, it largely consists of traditional sectors such as IT consultancy, Banking, Financial Services, Insurance and Oil & Gas, whereas the emerging themes such as Robotics, Artificial intelligence (AI), Blockchain, automation and electric vehicles are inherently missing in the domestic markets. In order to participate in the emerging themes and trends a rational portfolio has to shift his/her gaze towards the Global Investable Universe.
The benefits of such an investment are as follows:
- Diversification & low correlations
The most crucial benefit of global investing is the benefit of Diversification. Having a diverse portfolio helps in stabilizing the portfolio during market volatility. Investing in different geographies will ensure that volatility in one market will not disrupt overall returns, as there are low correlations between various foreign markets. This implies that the volatility of one market doesn’t impact your other assets.
- Bulls and Bears exist simultaneously:
Indian and Global Markets will not go in perfect unison. The same will go for asset classes as well, if one will be outperforming, the other might be beaten down. During the global financial crisis of 2008, the Indian stock market lost 56.8% but the US stock market witnessed a fall of less than half of that: 24.1%. In the next year, the Indian market rose by 91.5% but the US market appreciated by just 18.7%. For example, the S&P 500 (in rupee terms) has a low level of correlation with India’s Nifty 50 Index, just 0.13. Hence, an investor whose portfolio is mostly invested in Indian markets will derive diversification benefits by investing in the S&P 500 Index Fund.
- Greater Choice of Investments:
With the opportunity of investing globally, the investors can now invest in securities that will fetch them greater returns than what they would get by just investing in domestic markets. If one wishes to invest in Tesla, Google, Netflix or Facebook, they aren’t available on the domestic stock exchanges. Adding to this factor is that 2 markets will not move in perfect tandem, hence the zig-zag movements that will arise will allow you greater leverage to earn more. Whether an investor wants to have concentrated exposure to tech stocks because those themes are missing in India or whether he wants a simple plain-vanilla exposure, depends on investor risk and return profile.
- No country stays the winner forever:
No one country can stay as the top performer in global markets, the winner keeps on rotating across geographies. It is a common misconception that Indian Markets tend to deliver higher results, but if we compare benchmark indices the US markets have given a richer return to the investors than the Indian markets. The returns for India in the year 2019 stood at 10% whereas that for the US stood at 35%. And this changed for the next year where China gave outstanding results of 33% and India stood at 19%. If we wish to enjoy the rallies that various economies project, we need to actively consider investing globally.
How Can You Invest Globally? While we now know the benefits of investing abroad, the next big question that comes to mind is how? Investors should be aware of the limits as well as the routes by which such investments might be possible.
There are majorly 2 ways in which investors can involve themselves in global investing
- Direct Investing:
For the purpose of direct investing, the investor needs to open a separate Demat and trading account with a recognized and authorized broking house. Such investing initiatives require a significant amount of research about the stock, industry, sector and economy as well. Another option is to invest in ETF’s based on the stock indices such as Nasdaq and S&P 500, the benefit is that these ETF’s will track the indices and the returns will be similar to the returns the indices produce.
- Mutual Funds:
This is probably one of the easiest ways to invest in global markets. Many mutual fund houses in India also offer schemes that help in investment in foreign securities, and there is no need for a separate Demat and trading account. There is 4 type of mutual fund in India via we can invest like Passive fund, Active fund, FOF and domestic equity fund with international equity exposure.
Depending on an individual’s aim and objective, global investing can be a part of an investor’s asset allocation. Whether an investor wants to have concentrated exposure to tech stocks because those themes are missing in India or whether he wants a simple plain-vanilla exposure, depends on investor risk and return profile. Choose a fund that aligns with your profile and goal and consider the cost too. With the availability of so many options in active mutual funds and now also in low-cost passive products like ETFs, taking such exposure was never easy. Do the required homework, be smart and start your journey of Global Investing.
(Saarthi for your financial dream)