5 Global Stock Market Tips by Gaurab Parija

Invest in global stock markets to give your portfolio an international edge

The alarm on your Apple phone diligently wakes you up every morning, not getting offending even after you hit ‘snooze’ multiple times. Once you are up, your day is filled with Zoom meetings and Google Meetups. In your busy day, you also find time to go online and purchase a fantastic study table from the Ikea online store for your daughter. In the evening, once your day has almost come to an end, you sit back on your couch and watch your favourite Netflix series. It has been a good day. However, have you realised your extensive use of global products and services? Probably not!

Also Read: - How to invest in stock market for beginners

The fact of the matter is that the world is shrinking – you can now travel almost anywhere in the world, interact with people across the globe, and use products and services of companies located in different countries. Just like your daily life has become global, why can’t your investment portfolio as well. Investing in global stock markets, especially through international mutual funds can give a definite edge to your portfolio.

Guest: Mr. Gaurab Parija, Head – Sales & Marketing, IDFC Asset Management Company.

With over 22 years of retail sales and distribution experience, Gaurab has spent considerable time in breaking down investment products for investors and making them more palatable.
 
1. What is international investing?
 
Investing in asset classes and global stock markets, or markets outside India, or your domestic market, is termed as international investing. People usually invest widely in their home countries and prefer such investments because of the inherent country bias. Country bias involves two aspects – since investment requires money, people are wary of investing it in a landscape not known to them.

Additionally, they also find it easier to understand and track the records of home-based companies. Investing in global stock markets takes your portfolio to the next level. In the US, Sir John Templeton showed residents that there is life and investment opportunities beyond their own country, bringing about the concept of international investing. The progress in India has been fairly good – there is a long way to go but we are seeing increasing interest in the segment.
 
2. Why should investors consider investing in international stocks and, more importantly, who should consider investing in international stocks?
 
People are now increasingly aware that asset allocation is an important part of wealth creation. Parking funds in diverse asset classes, be it gold, stocks, debt, real estate, etc., reduces risk. Further, as markets are getting more and more linked, optimal asset allocation should also include geographical diversification via investment in global stock markets.

The reasons behind this include:

i. Other countries might be doing relatively better when your country is facing volatility. Find countries with little or no correlation to your own country.

ii. If you know foreign companies which are doing very well, invest in them. The aim is to participate in growth opportunities across geographies. We are already helping foreign companies like Uber and Apple grow by consuming their products, so why not participate in their growth stories by investing in US stock markets?

iii. From a global GDP perspective, India only comprises 3%. Limiting investment to India leaves out 97% of the global GDP.

iv. Exposure to developed markets like the US stock market can reduce portfolio volatility.

Given the fact that the ease of investment has increased over the years, anyone with a reasonable amount of wealth should consider investing in global stock markets, based on their personal risk profiles and financial goals. Also, families that have dollar or other currency liabilities due to their children studying abroad should create dollar assets, by investing in US stock markets, to balance it out. Investments in global stock markets can help you create dollar assets. But it is important for you to remember that you are not just investing for the dollar edge but also for strong returns and diversification.
 
3. As an Indian investor, there are basically two ways by which I can invest in international stocks – either directly or through international mutual funds. In your opinion, which option would be better and why? – Can we also define international mutual funds here?

In a person’s life, there are two sources of wealth creation – salary or income and investment. Your focus should be on enhancing income by improving your career and the investment part should be managed by professionals or mutual funds. If you are a part of the investment industry and know all the underlying aspects, you can invest directly. However, if you don’t really know about underlying stocks, it is better not to attempt direct investing in global stock markets. Further, when it comes to international investing, you may not know the inherent vagaries. Therefore, it might be better to invest via international mutual funds.
 
International mutual funds invest in foreign companies that are listed on global stock exchanges. Such funds now offer access to all asset classes, making it better to invest via these schemes. Opportunities available through international mutual funds include investing in US stock markets like the NASDAQ and S&P 500, FAANG companies, ESG companies, consumption oriented funds, gold/mining funds, global funds, emerging market funds, and Chinese funds. However, from an Indian perspective, international investment should be a complement, not the core of your portfolio. It is best to invest 15-20% of your corpus in such funds. Choose international mutual funds following broad foreign markets and you can potentially add good value to your portfolio.

4. What are the risks in international investing ?

The risks inherent in international investing include: 

i. Inability to track what the underlying company does, if you are investing on your own.

ii. Currency risk as we never know what might happen in the future. All currencies have a potential for depreciation.

iii. Choice of underlying stock 

iv. The normal risk in equities, layered with currency depreciation, is the risk you take when investing in international mutual funds.

Investing via international mutual funds is more secure as they make a full assessment of the stocks, reducing the underlying risk considerably.

5. What should be our key takeaways and what is your advice to investors?

i. There are several clear benefits to investing in global stock markets, including geographical diversification, which can help you reduce the impact of volatility on your portfolio.

ii. Developed market equities, like US stock markets, are more stable than emerging market equities.

iii. International mutual funds offer a fillip to portfolio returns through participation in themes not available in domestic markets.

iv. Always keep in mind that limiting the downside is as important as cashing in on the upside.

v. If you have recently begun investing in equities, first get a hang of the domestic equities and then move to global stock markets.

My final advice would be to avoid comparing Indian and international funds. Your equation should not be based on choosing between India or international, it should be a combination of Indian and international funds as they complement each other. This is the way to sound investing.