Why Global products are good for your investment

Investors around the world usually prefer to invest in domestic equities, but investors in developed markets also allocate a portion of their investment portfolio to international equities. In recent times, we are also seeing growing interest about global products among retail investors in India. Several global products were launched in the last 2 years. Assets under management (AUM) in fund of funds (FOF) investing overseas, though a tiny fraction of total mutual fund industry AUM, saw a 3 times jump in AUM in the last 12 months ending 30^th November 2021 (source: AMFI).

Why you should invest in global products?

• Diversify single country risk: If you are investing in equity or debt products of a single country, then you are exposed to country risk. Many people may not perceive their investment portfolio comprising only of domestic equity or debt to be exposed to single country risk because India is our home country. However, from an investment viewpoint you are exposed to single country risk. If your home country, as a market, underperforms, then your portfolio will also underperform. Country risk can manifest in various forms e.g. natural calamities, pandemics and geo-political crisis (e.g. war, trade sanctions). You can diversify single country risks by investing in global products.


• Provide stability to your portfolio: There is low correlation of returns of different markets. Investing in global equities can diversify risk considerably and bring stability to your portfolio. The chart below shows the returns of MSCI India Index and MSCI World Index in constant currency terms (US Dollars) over the last 12 years (since 2010).
  
  You can see that, India outperformed MSCI World Index in 6 out of the last 12 years (up to 30^th November 2021). However, MSCI World Index outperformed significantly on a relative basis when India underperformed. A portfolio comprising of both domestic and international equities can bring stability to returns.
  
  

  Source: MSCI India Index (USD), MSCI World Index (as on 30^th November 2021). Disclaimer: Past performance may or may not be sustained in the future.



• Exposure to global mega-trends: The Indian stock market is dominated largely by traditional industry sectors like Banking and Finance, Oil and Gas, Automobiles and Auto Ancillaries, IT Servicing, Metals, Pharmaceuticals, Cement and Construction, Power, FMCG etc. Through global products, you can get exposure to investment themes, especially in the technology space, that are currently not available in the Indian stock market e.g. E-commerce, Social Media, Online Streaming, Gaming, Artificial Intelligence, Cyber Security, Robotics, Electric Vehicles etc. Many of these themes have huge global markets and high growth potential.


• Diversify currency risk: Currency risk is relevant for investors who may have spending in foreign currency e.g. overseas education for children, planning a foreign vacation etc. If you are saving or investments are in domestic (INR) assets and if the foreign currency in which you have to spend, appreciates against the INR, then you will have a bigger outgo from your savings. The underlying securities of global products are denominated in foreign currency (e.g. US Dollar); if dollar appreciates against the INR, the Net Asset Values of global products will also appreciate. Therefore, Global products can also help you diversify currency risk.


• Benefit from appreciation or depreciation of the currency: The INR has been generally depreciating over the last 10 years or so. INR depreciation adds to the returns from global products for the reason mentioned above. However, one should not invest in global or international equity, just to benefit from currency play. Equity risk is a far more important factor than just currency risk.

How to invest in global products

• You can get exposure to global stocks by investing in fund of funds (FOFs) schemes of mutual funds which invest in overseas securities. These FOFs invest in international mutual funds or exchange traded funds (ETFs). You can invest in these funds like any other mutual fund scheme.


• Investors should know which market or markets the FOF is investing in to make informed investment decisions.


• Investors should also understand the investing objective of the FOFs e.g. theme, potential opportunity, fund strategy etc. before investing.


• Investors should also check the track record of the underlying funds of the FOFs before investing.


• Investors should know that global products are subject to debt taxation and do their tax planning accordingly.

Investors should consult with their financial advisors if global products are suitable for their investment needs and what portion of their asset allocation could go into global products based on their risk appetites.