Investing in International Markets: Pros & Cons

International investing - whether directly via foreign stock exchanges or with mutual funds FOFs (Fund of Funds) is trending with investors. But sane investors are also vary of certain facts before they go ahead with such trendy stuff.

WHY International Investing?

There is no need to follow the herd. The first question that any investor should be asked themselves is the value addition that any new type of investment will bring to their own portfolio.

There are two primary reasons for any investor to invest in international markets:

• International Investing allows the investors to buffer their returns from international currency rate fluctuations. So, if you are planning to send your children to foreign study or if you are planning international holidays in the future, then it might be a case to do some international investments rather than depending entirely on domestic investments.

• It allows the investors to add diversification to their portfolio. Of course, the international markets work in different cycles and thus they add a smart diversification to any portfolio.

WHO should invest in international assets?

• Investing in international assets is riskier than domestic assets for various reasons, the primary being the shallow awareness about the country and the company where the money is being invested.

• International Investing involves a certain level of risk profile before investing. Such investing should only be done if recommended by your advisor as a part of your investing strategy.

• Limit the international exposure to what is recommended to you by your advisor. Going beyond 5% of total portfolio allocation for international investments is very high risk.

WHICH countries to invest in?

• Stick to the international funds or ETFs (Exchange Traded Funds) as suggested by your financial advisor.

• We generally stick to US as a country. US market has a lower beta with India as compared with other emerging markets like China, Taiwan etc. The market depth and liquidity also provide comfort. [Read about Alpha and Beta in markets]

• US markets are also more transparent than other international markets.

HOW to invest in international assets?

• One can invest directly into international stock exchanges. There are, of course, limitations and rules governing such direct investments, as governed by RBI.

• Alternatively, one can choose to invest in international companies via Indian international mutual funds. This path is much simpler and has much lesser restrictions or overheads.

• One can also invest in international assets via Indian ETFs (Exchange Traded Funds). ETFs need a demat account but are more efficient than mutual funds.

The risk with direct international investing

• We will always know much lesser about international socio- economic situations as much as we would know about India. So, direct investments in international stocks should be attempted only if you have a lot of time to study and analyze the country, its culture, its economic perspective and so on. Better avoid. 

• For international investing, stick to International Mutual Funds, as recommended to you by your financial advisor.

Summary

• There is no point investing for the sake of investing.

• India is poised for a much better growth than any other country in the world, and we know about India much more than any other country. Then, why go international.

• Stick to the allocation to international funds only if needed and that too only up to the extent recommended by your financial advisor.

Regards

Manoj Arora
Official Website