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Invest Outside India to diversify your portfolio

In this episode of Dhan ki Baat, Prashasta Seth, Chief Investment Officer, IIFL Asset Management Ltd, discusses the process of Investing Outside India and how it is a worthy option to diversify your portfolio.

1061 views  20 Mar 2018

Why you should Invest Outside India

Diversification is one of the most vital tenets of investing. The central idea is to have your capital spread across different industries and/or financial products to protect your corpus from a single loss. One of the primary reasons that your investments go bad is the negative state of the stock market or a poor performing domestic economy. But if you also have investments outside India,you mitigate your losses if the Indian stock market collapses. Investing money abroad is one of the innovative strategies you can employ for the protection of your investments through diversification.

How to Invest Outside India?

Before 2004, investments outside India were not allowed. However, in 2004, the RBI announced the Liberalized Remittance Scheme (LRS) for Indians to invest abroad. Under this scheme, an investor is allowed to remit $250,000 per financial year, which can be done through shares, property or other assets.

Why should you invest outside India?

Investing outside India has proven to be the key factor in diversifying your investments.Historically, the risk factors associated with investments outside India are less as compared to the Indian stock market. Further, global equities and bonds have a low correlation to Indian equities as shown in the table below:

Correlation Coefficient Nifty
Global Equities 0.434
Global Bonds -0.474

This means that the volatility of the Indian stock market would not affect global markets to such an extent. Lesser volatility implies more safety.

Investment opportunities

Equities: Tech Stocks

If you are looking to invest outside India in tech stocks, you can consider investing in technology giants such as Facebook, Apple, Amazon, Google, Microsoft etc. Being the biggest publicly traded companies in the world, these companies have provided investors with consistent and good returns.

Returns 5 Years 10 Years
MSCI USA Information Technology Index 22.1% 14.5%
Nifty 50 Index (USD) 10.6% 3.4%

Equities: Emerging Markets

Investors can also invest in markets of many other emerging markets like China, Brazil,Indonesia, Russia, Taiwan etc. Some of these markets are trading at cheap valuation (as low as PE-12.5x).

Returns 1 Years 3 Years
SPDR Portfolio Emerging Markets ETF 28.10% 8.17%
Nifty 50 Index (USD) 22.70% 5.24%

Fixed Income Markets

Fixed income includes different type of bonds such as investment grade bonds, high yield bonds, treasury bonds, convertible bonds etc. A large number of Indian companies, including various government-owned banks, have issued INR-denominated bonds outside India, called Masala Bonds, which provide another option to invest outside India.

1 Years 3 Years 5 Years 7 Years 10 Years
Bloomberg Barclays Global High Yield Bonds Index 6.87% 6.46% 5.39% 6.63% 8.23%
Bloomberg Barclays US Convertible Liquid Bond Index 14.45% 8.92% 11.19% 8.96% 7.69%

New Asset Classes: REITs

REITs make an interesting part of your diversified portfolio. These are a combination of various properties, which are monitored and managed by fund managers or professionals. REITs work by investors pooling in money, buying property and earning returns through rent or profit on sale of property. As an investment avenue, REITs have shown strong returns in the past and have low correlation with other asset classes.

Returns 1 Years 3 Years 5 Years 7 Years
Global REITs 7.98% 4.98% 8.62% 9.88%

Risks Involved

Each investment avenue, whether fixed-income (debt), equity or REIT (real estate) comes with its own risks:

Fixed Income Funds

  • Credit Risk
  • Interest Rate Risk
  • Liquidity Risk
  • Concentration Risk
  • Borrowing Risk
  • Risk of change in Leverage Term
  • Counterparty Risk
  • Market Risk

Equity Funds

  • Emerging Market Risk
  • Geographic Focus Risk
  • Equity Investing Risk
  • Index Tracking Risk
  • Liquidity Risk
  • Market Risk
  • Currency Risk
  • Valuation Risk

REITs Funds

  • Market Risk
  • Income Risk
  • Concentration Risk
  • Liquidity Risk
  • Borrowing Risk
  • Refinancing Risk
  • Other Risks: Sector or Country Regulation Risk