Should You Invest In Foreign Equities?
The financial equivalent of placing all your nest eggs in one basket is kind of an overemphasis on investments in a single country. Exposure to foreign equities investments can have many benefits for investors. At first glance, while the asset for international equities in India has been somewhat inconsequential compared to their domestic peers, they have been climbing up the ladder. Over the past fifteen or so years, since foreign equities debuted in the Indian mutual funds’ space, they have steadily evolved by allowing investors to park their money in global markets.
It’s a natural extension of diversifying investments across various asset allocations, which will, in turn, add to one’s returns on investments.
What Are Foreign or International Equities?
As the name suggests, international equities are stock options that invest in securities of international companies listed on foreign markets. In terms of their structures, it can be said that these equities are the kind of funds that are invested directly in foreign markets. These funds use a feeder route to invest in an existing global fund and funds of funds to achieve international exposure. However, these funds function in the same way as domestic funds do. You choose to invest in rupees, get units allocated in the funds’ scheme, and the fund’s NAV is available to monitor its progress.
All international equities are managed by Indian mutual fund companies, following the mandatory rules and regulations that are laid down.
Why buy/invest in international equities?
As fancy as it may sound, investing in international equities offers a range of benefits for the investor – both seasoned and amateurs alike. Some of the reasons why international equities should be a part of your financial portfolio include the following:
Global geographical diversification of funds
While most of these companies (Google, Facebook, Apple, Twitter) are headquartered in the US, they have a vast customer base in India. Since a huge chunk of India’s populace uses their services, a natural extension for investors would be to experience an investment opportunity in these companies. Since growth prospects of such companies are spread globally, the returns often multiply drastically.
Access to new growth opportunities
Interestingly world markets are not directly correlated. Different market indices perform differently across various time zones, and the performance of such market indices can be viewed only over a certain period. This can be understood from the fact that even a domestic fund scheme retains top performance across different market cycles and times. It’s the same for international equities. Diversified asset allocations, including international equities, are often advised.
How to buy international equities, and how much to diversify?
Two major ways of investing in international equities are direct and indirect. In the former, there’s a limit capped in terms of the amount, while there are no such restrictions in the latter.
One simply needs to open a trading account (not a DEMAT) with Indian brokerages that have tie-ups with their foreign counterparts, making the process smoother. An online trading account can be opened along with government id proof followed by verification, following which one can start trading.
There’s no standard reply when it comes to “how much funds to park” in international equities. While it depends upon individual risk appetite, experts often advise choosing between 10 to 15 percent of the total portfolio.
Some of the leading global stock market indices include:
- Dow Jones, NASDAQ, NYSE International 100 (United States)
- FTSE 100 (Great Britain)
- Hang Seng (Hong Kong)
- Sensex, Nifty (India)
- S&P/ASX 200 (Australia)
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