ICICI Securities, Motilal Oswal, Zerodha, Kuvera… Be a full-fledged broking house or a discount broker, all are being too ambitious and competing to offer overseas trading facilities at minimal cost. Courtesy to new generation platforms like Vested Finance or interactive brokers, savvy investors are jumping in to tap this opportunity.
Let’s rewind back to 2009, where number of people looking for overseas investment was abysmally low. Poor investor participation led brokers to believe that they were fighting a losing battle. One can argue that India was the hot investment destination after the subprime mortgage crisis and hence, people were being skeptical “Why go global when there are tremendous investment opportunities locally?”. However, with time, this perception has changed, so did the bias for investing in home country.
So, what brought this radical shift in investor’s behavior in the last 10 years?….
Changing Investor Perceptions
Welcome to 2020, the year which shook the world and India was no exception.
It’s true that Indian markets have tremendous potential to generate superior returns but have they really outperformed our dear Uncle Sam?
Let’s understand how US markets fared with respect to Indian Markets :
This graph clearly shows how S&P 500 index has comfortably beaten Nifty 50 in last 10 years. Also, the Indian equities have seen more volatility in returns over the years compared to US Market.
Can we really count on Rupee as our reserve Currency?
Rupee has depreciated by almost 5% every year compared to US dollar. Depreciation can itself have a long-term effect on your finances as everyone is spending in dollar terms today. Who does not like to own a cool pair of Apple air pods or like to enjoy a foreign trip, or educate their kids abroad? All this point to a fact that being avid consumers of global products/services, its crucial to hold some proportion of your investment in dollars.
People want to invest in their future
Apple, Google, Netflix, Facebook, Tesla etc. are the brands which everyone wants. Why? Because these products have become a part of our everyday lives.With innovation and technology comes high growth potential promised by these top companies. So, going gaga over them is the new normal, especially for millennials who are weighing high returns over risk.
The Impact of Pandemic- COVID 19
Throughout history, there are certain events which force us to follow a trend. In 2020, this trend changer or rather, X force has been COVID -19. The pandemic has taught us to evaluate the risk and opportunities available in international investing in a better way. In other words, focus has shifted to creating “All Weather Portfolio” which can storm out such events.
“All Weather Portfolio” is a term coined by Ray Dalio of Bridgewater Associates, world’s biggest hedge fund. It basically means diversified mix of securities. Now, diversification can be of various types:
- Asset Classes (across and within asset classes): Across asset classes means money can be allocated in different assets like Equity, bonds or gold. And within asset class refers to choosing different investment instruments like ETF’s or Mutual funds, FD’s etc.
- Strategy Diversification : With asset classes also, one can follow a strategy like Value investing, Dividend generating stocks, Bluechip Stocks etc.
- Industrial Diversification : It means investing in companies across different industries to reduce cyclical imbalance.
- Geographic Diversification : Investing across countries like buying real estate in India and US or, buying bonds in India and Equity in US. Basically, getting the best of the world markets to achieve portfolio returns and weathering out the abnormalities.
Over the years, we have seen that diversification across and within asset classes is mostly understood by all. However, geographical diversification is the one which is known to all but practiced by none. The need for going global is all the way more relevant now as the economy is becoming more connected and India is the epicentre for this global expansion strategy.
Getting back to our point, how can diversification by geography be a game changer?
Let’s see how US Markets has performed w.r.t. Indian Markets during and post Covid.
The market crashed on account of coronavirus pandemic on 20th Feb’2020 and ended on 7th April 2020. It was one the fastest fall in financial history signalling the beginning of another recession. During this timeline, if we compare S&P 500 Index with Nifty,we saw panic selling happening in both markets. However, Nifty crashed by 23% while Dow Jones fell by 13% approx. Also, in recovery phase from April onwards, S&P 500 has shown resilience while Nifty has been testing our patience ever since.
To summarise, Rs 1000 invested in Indian markets in the beginning of Jan’20 would have become Rs 956 in beginning of Oct’20, a fall of 5% (CAGR) And in US Markets, $1000 would have become $1013, thus realising gains of almost 2% (CAGR).
One can argue that markets have plunged worldwide, then why should we trust Uncle Sam? Well, the catch here is the INR Dollar price appreciation. In this year alone, Dollar has appreciated by 4.6%w.r.t. Indian rupees which means as dollar appreciates in value, so does your portfolio return. This further makes international diversification a smart investment decision especially in volatile scenarios.
Let’s take a look at the performance of an UTI Nifty Index fund with the world’s most renowned ETF: SPY by SPDR which tracks S&P 500 index. The objective is to understand the total returns (Specific fund return and dollar returns) generated by these funds over a 7-year period. (7 years as UTI Nifty fund was introduced in 2013.)
SPDR’s SPY ETF representing top 500 US companies has generated higher return over UTI Nifty Index fund over a 7 years period.
*Nifty Index fund is used as Nifty BeesETF involves tracking error and is subject to liquidity risk.
Despite promising performance and resilience displayed by US Markets, only $431 Million was invested overseas by Indian residents in 2019-20 which is a meagre 0.1% of India’s financial wealth. The main deterrent being the challenges faced by investors in terms of brokerage charges, taxation structure, capital investment among others.
New generation platforms like Vested Finance, Winvesta, Interactive Brokers are bringing the barriers down with introduction of facilities like Zero commission trading & Fractional shares investing. Fractional ownership of shares is a process which allows investors to buy partial shares of a stock; that is buying less than a single share.
For example: If you want to buy stock of X Ltd. which has a share price of $100, but you have just $20, i.e. you can purchase 1/5th of the stock if your broker offers the facility of fractional ownership. This way of owning fractional shares is known as dollar-based investing. You can specify the amount you want to invest and buy the shares depending on your capital. When you buy a fraction of a share, you are treated the same as any investor with a full share. You make the same percentage gains and also share the same risks.
Related article : REIT Vs Real Estate Crowd Funding | Should you consider ‘Fractional Real Estate Investments’?
This facility holds key significance because dollar denominated prices of top companies (FAANG) is the biggest hurdle faced by small investors. Thus, easy access to fractional ownership will make it possible for small retail investors as well to invest in top companies which were beyond one’s financial reach, thus paving the way for global investing.
“FAANG” is an acronym that refers to the stocks of five prominent American Technology companies : Facebook, Amazon, Apple, Netflix and Google (Alphabet).
This is a guest post by Gursimran Singh of ParamAsa Wealth Advisory.
About the Author
Gursimran Singh is the founder of ParamAsa Wealth Advisory, a SEBI Registered Advisory.
Gursimran has more than 20 yrs of experience working in Fortune 500 Companies. He provides fee-only financial advisory services. (SEBI RIA No – INA100009798)
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(Post first published on : 26-November-2020)
