Global Investment or International Investment is a strategy of selecting the global-based investment options for your portfolio. These investments include options like Mutual Funds, exchange traded funds and direct investments in foreign markets.
The reason you should consider global investments is that by spreading your money among several markets, you achieve what stock market theorists have been propounding for years–diversification and hedging risk by spreading it across a mix of assets and markets. Individual economies are subject to economic cycles. By investing in several economies at a time, your portfolio can earn smoother returns.
Besides, reducing risk through diversification and global investing can also boost your portfolio returns. With no country managing to be at the top of the charts each year, the case for spreading your investments across countries definitely gets stronger.
Generally there are three types of funds:
1. Direct investing in global markets
2. Funds that use feeder route to invest in Global Funds
3. Fund of funds that invest in several funds to achieve international exposure
Like any other global investment has its own set of risks
Benefits of Global Investing
Diversification
Diversification is the most obvious yet the most crucial benefit of global investing. A diversified portfolio acts as a source of stability during market volatility. When you spread out your investments across geographies, there is a low correlation between them. This means that the volatility in one market is likely not to affect your other assets.
Many of the US-listed companies have global revenues. Over 40% of the revenues of the S&P500 companies comes from outside the US. By investing in the US itself, you can build a globally diversified portfolio.
Wide range of investment options
Global investing enables you to access investment opportunities that are not present domestically. Developed markets like the US are home to some of the world’s largest tech companies – something you cannot access by investing in India.
You may even choose a theme or a combination of multiple sectors. For example, you can prefer the US market for technology, Europe for engineering, and Australia for commodities. If you are interested in healthcare or pharmaceuticals, there are several options in the US and Europe.
You can access multiple geographies through ETFs. For example, you can invest in German equities through the US-listed EWG ETF or in the Brazilian market through the EWZ ETF.
Investment Protection
Another significant benefit of global investing is the protection of investments against fraud and liquidations. Developed market companies generally have strong regulations that ensure sound corporate governance and severe penalties for market abuse. This protects retail investors from potential scams and insider trading losses.
Remember, capital is always at risk, but many foreign financial institutions, offer protection from seizures and other threats such as liquidation of the broker-dealer. For instance, in the US, SIPC protects investments up to $500,000 if your broker-dealer faces liquidation.
Currency Diversification
Investing overseas exposes you to currency appreciation (or depreciation). For example, the USD has been appreciating, on average, between 3-5 percent versus the INR over the last few years. Emerging markets’ currencies depreciate over the longer-term. Interest rates in domestic savings accounts are at a low 3-4 percent on average.
By investing globally, portfolios have generally had the dual benefit of better markets and appreciating currencies.
Risks of Global Investing
The benefits of international investing are evident. However, one must also consider the risks that come with it. There are three risks that you should be aware of while investing globally.
Higher Transaction Costs
The most significant barrier to investing in global markets is the added transaction cost, which varies depending on the foreign market you want to invest in. For the US markets, Winvesta offers zero-commission brokerage, which is cheaper than even domestic investing. For many other markets, access may not be as inexpensive.
There may be additional costs like FX conversion charges, transfer fees, and annual maintenance fees that you should know on top of the brokerage commissions.
Currency Volatility
When investing directly in foreign markets, you first have to convert your Indian rupees into a foreign currency at the current exchange rate. Let’s assume you own a foreign stock for a year and then sell it. You then convert the foreign currency back into the Indian rupee. That could help or hurt your return, depending on which way the domestic currency is moving.
Political Risk
While investing, you should also consider the geopolitical environment of the country. Political events affect the domestic markets of the country and may lead to volatility. In developing markets, government and policy decisions could hurt even the most prominent companies. We have seen this frequently in countries like Brazil and Argentina.
Conclusion
International investing has become the need of the hour to achieve strong portfolio diversification. While the benefits are lucrative, you must pay attention to the risks as well. There is a lot of information available online to measure the risks and ensure your portfolio’s right mix. You may also consult with your financial advisor before making any investment decision.
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