Investing into overseas stocks, good way to diversify portfolio

Stock market investing is not just about taking part of a price movement associated with each scrip but taking share of a business. With the global integration of various businesses, it has become seamless to consume the products or services of a particular region across the globe.

While we end up using many such products or services sitting at our home, the companies which produce them mayn't have been listed on our bourses. Moreover, there could be certain area of services or technology which is futuristic and are less prominent in India.

So, the biggest names in various technology, banks, manufacturing, etc. are not listed in India. How could one take advantage of this? The solution is investing in foreign equity via various media. Moreover, when we look at the history of our Indian currency, it has been depreciating at various intervals against the US Dollar and also against other major world currencies like that of the Pound Sterling and Euro.

When an investor is exposing their money to international equity, it invariably gets invested in that particular currency and so any depreciation of rupee i.e. any appreciation of their currency is an additional alpha to the investor. Thus, the currency gain alone forms a decent attraction for investing in foreign equity.

Another important reason is the need for diversification of the portfolio. While most of us dwell in the sub-categorization of the existing portfolio, one needs to consider that all the investments are being done domestically or carry a single country risk. When an investor exposes part of their portfolios to assets based or linked to other countries, the concentration risk is minimized.

The options of investing in international equity requires a trading account which allows the purchase of these instruments. The RBI has approved a limit of $200,000 per annum for resident individuals to invest abroad. This ceiling is without any restrictions on the type of assets purchased in a foreign country and could be doubled for couples pursuing together.

However, only a very few demat account providers are currently facilitating overseas equity investments. Besides, these accounts have higher brokerage costs.

If one is not keen on a particular stock(s), then an Exchange Traded Fund (ETF) could be an easy option.

Though ETFs are restricted to couple of larger indices, investors looking for a bit of diversification could benefit from these choices. However, to transact in these, one doesn't need an international trading account and so could eventually turn economical. The other important factor to be considered when investing in ETFs is available liquidity in these products.

Another convenient option is through mutual fund offerings which have a predominant international exposure. Most of these offerings are fund-of-fund (FoF) which means the funds collected through these funds are fed into another actively managed fund abroad. That's why these are mostly feeder funds and simple to operate for investors. Investors with or without a demat account could start transactions post the mandatory compliance of KYC.

Of course, there are some hybrid funds that are also available for the interested investors. A few of the current offerings in India allow the fund to participate up to 30 per cent of the corpus in the International equity.

Though there're funds investing in other geographies (China, Europe, etc.) most of these funds concentrated on the US dollar denominated instruments. Hence, it's better to know the correlation between USD's impact on stock markets.

When the dollar is up, emerging-market stocks are to tend to perform poorly. An exposure aligned with a goal like that of foreign education needs or travel over a long period of time is ideal when exploring international equity. As a mere diversification, one needn't exceed beyond 10 per cent of their portfolio.

(The author is a co-founder of "Wealocity", a wealth management firm and could be reached at [email protected])