All investors suffer from what we call the “Home Bias” in behavioural finance. Investopedia defines Home bias as the tendency for investors to invest in a large number of domestic equities, despite the benefits of diversifying into foreign equities. Since India is seen as one of the favourite markets for global investors to invest in, this bias becomes even more pronounced if you live here. In this article I have outlined the reasons why you should invest some portion of your portfolio globally.
1. You spend regularly in foreign currency
Many investors have expenditures in foreign currency. It is not just on foreign holidays but also on education. When it comes to education, there is a growing trend for people to study in international curriculums such as the IB or IGCSE. Even if you are paying your fees in local currency, part of it has to be remitted as Royalty to the institutions that manage these programs. Obviously if the Indian Rupee depreciates you would have to shell out that much more for these fees. So if you have expenses in foreign currency, it makes sense to invest a portion of your investments globally.
2. Fast growing businesses can be found across the globe
In the last few years, real growth has been driven by Technology. The 5 biggest technology companies (popularly known as FAANG stocks – Facebook, Apple, Amazon, Netflix and Alphabet’s Google) are part of the NASDAQ index and if you invested only in India, you would have missed the tremendous growth opportunity that these stocks provided. The Motilal Oswal NASDAQ 100 Exchange Traded Fund delivered CAGR of 17.77% as compared to 9.42% for Nifty 50 for the last 5 years (source: Value Research – as of June 11, 2019).
3. Better Diversification
This is an obvious one. If you invest globally, you get better diversification as international stock markets are not fully co-related. There are theories out there that talk about the Indian stock markets coupling with global markets but that may not be the case always. There is always merit to be globally diversified.
4. Availability of domestic investment vehicles
For several years, Indian investors would have to repatriate to invest overseas. This is no longer the case. The indian mutual fund industry offers a variety of choices that you can use to invest overseas. You can use Feeder Funds (example: HSBC Brazil Fund), Funds that invest directly into international stocks (example: ICICI Prudential US Bluechip Equity Fund) or Exchange Traded Funds (example: Motilal Oswal NASDAQ 100 ETF).
5. Alignment of tax rates
Indian equities carried a favourable tax rate over international equities for a long period of time. If you bought mutual funds that primarily invested in indian equities, the Long Term Capital Gains(LTCG) was tax-exempt. On the other hand, if you had invested in mutual funds that invested primarily in overseas equities, the applicable tax rate would be similar to what you would pay on debt funds. With the imposition of LTCG taxes on Indian equity mutual funds last year, this gap has narrowed tremendously.
