A case for international investments

Anubhav Shrivastava,Partner, Infinity Alternatives

The world is in turmoil, jobs are scarce, and the sustainability of employment is uncertain. We build our savings over our working lives to provide a hedge against severe disruptions in our lives.

However that ‘hedge’ which savings provide are prone to wild fluctuations in value from both counterparty risk (that is the risk coming from survivability of the institution which we have investment monies with  - a case in point being the depositors at PMC Bank or those who held Fixed Deposits with DHFL) and  market risk (an example would be the midcap investors who have seen significant erosion in the value of their investment over the past two years). In both cases, albeit extreme examples, the trade-off has been between inherent risk and expected returns – both go in tandem.

However, that does not mean neither have a place in our portfolios and in certain market conditions, it may be desirable to take a finite amount of exposure to those market segments for increasing the yield on the portfolio, should the investor/saver so desire. As markets are uncertain, there is a need to mitigate some of the risks.

Fixed income

Fixed-income risk comes from the inability of the Bank or Company (who we have lent money to). Classic examples we see are NBFCs or those taking in deposits in lieu of Gold (this has since been made illegal by RBI). The simple solution to this is to look at who the company or Bank it, what is their size, whether the deposits have a legal basis (approved by SEBI / RBI) and what the rate of return is. The higher the return the higher the risk – there is no such thing as a free lunch. As a rule, it makes sense to spread out deposits over a few firms so that one can target a desired rate of return.

Tradable Securities

With tradable securities, it may be a different approach that may help mitigate a bit of that risk. First is to go for professionally managed funds or better still, using the collective intelligence of the markets, use Exchange Traded Funds. Buying the Sensex and /or a Midcap ETF will result in exposure to between 130 and 180 companies. Percentages can be varied depending on how risky the portfolio needs to be. However, this does not take us away from India risk - if the economy slows down, then so will financial market returns.

International investments

Enter international investments. These are those markets that have weaker correlations to Indian investments and lend themselves well to asset allocation diversification requirements. As they don’t necessarily move in tandem with Indian markets (an exception being a global crisis). In a portfolio of Indian and International securities, a move in one may give an opportunity to buy or book some profits in another. Over longer periods, more such securities can be added depending on investors’ needs.

Having said that, investors can access International markets one of two ways: through the Liberalised Remittance Scheme from RBI which allows for $250,000 remittance per year for investing in approved securities. Depending on the broker one uses, this requires higher minimum investment amounts and gives a wide range of investments to choose from. Those securities can only be traded during those countries’ market hours and may not be ideal for all.

The other option is to buy ETFs’, Index Funds and Actively managed funds in India – these have the pass-through benefits of regular Mutual Funds and can be bought and sold in small ticket sizes. However, compared to say the US markets, the rage of funds is likely to be limited at the moment but should suffice for anyone looking at dipping their feet in International waters.

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