Picture this: You are scrolling through Instagram on your iPhone sitting in a Starbucks Cafe, and then you remember you have an order to place on Amazon, you book your order, end up drinking your coffee, and catch a ride back to your home through Uber. You are probably reading this article on a device that has been powered by a chip made by Nvidia. These global brands have made their way into our daily lifestyle and are shaping the new world that we currently live in.
So, if our lifestyle has brands that are from India and abroad, making our lives easier and efficient, shouldn’t our portfolios have a blend of Indian Stocks and these global companies that are front runners in global innovation to make our portfolio efficient and stable?
Today, we understand how international exposure in equity can be beneficial for our portfolios. We also understand how you can easily gain exposure to them through Indian Mutual Funds.
Why International Diversification is Important?
We already understand that diversification is important for the portfolio to reduce portfolio volatility and risk, but diversification is not just about investing across asset classes or across sectors. It is also about investing across geographies to help reduce the concentration risk of being invested in one just economy. While India is an emerging economy, diversifying into developed markets like US provides stability to your portfolio by reducing overall portfolio volatility.
We plotted the charts of Nifty, Nasdaq, and S&P 500 for the past 20 years to understand how similar investments in three indices would turn out. Here is what the chart shows.
Source: Nifty Indices, Investing.com, EduFund Internal Research
As you can observe, while the overall trend of all the indices has remained similar, there has been instances in various blocks that show how the indices have diverged movements; especially Nifty 50 & Nasdaq 100. Also observe, that Nasdaq 100 has outperformed Nifty 50 over the 20 year period.
We also plotted the INR adjusted values of these indices to better understand the impact of INR depreciation impact on US Portfolio over the years.
Source: Nifty Indices, Investing.com, EduFund Internal Research
Observe the difference on portfolio once the impact of INR-USD rate is considered. Nasdaq went on to increase substantial difference with other indices. A ₹10,000 investment in Nasdaq 100 would be more than 2X of similar investment in Nifty 50 at the end of 20 years. S&P 500 which lagged on its own performance ended up almost catching up to Nifty 50 returns once the currency impact was factored in.
This explains that while the overall good performance of US Markets helps the portfolio, the depreciating INR works as the second engine to boost up the returns earned in the portfolio.
We also observed how the Standard Deviation of the Portfolio gets impacted with the inclusion of International Indices to understand the volatility impact.
Index Portfolio Standard Deviation Change in Standard Deviation Nifty 50 21.15% – Nasdaq 100 22.46% – S&P 500 19.52% – Nifty 50, Nasdaq 100 & S&P 500 16.73% -21% Nifty 50 & Nasdaq 100 17.32% -18% Nifty 50 and S&P 500 16.04% -24%
| Index Portfolio | Standard Deviation | Change in Standard Deviation |
|---|---|---|
| Nifty 50 | 21.15% | – |
| Nasdaq 100 | 22.46% | – |
| S&P 500 | 19.52% | – |
| Nifty 50, Nasdaq 100 & S&P 500 | 16.73% | -21% |
| Nifty 50 & Nasdaq 100 | 17.32% | -18% |
| Nifty 50 & S&P 500 | 16.04% | – |
Source: EduFund Internal Research
The Portfolio when included international exposure saw a decrease in Standard Deviation by up to 24%. This is possible because of the lower correlation between Indian and the US Markets which have remained in range of 0.7 – 0.8 throughout the years; helping stabilise the portfolio volatility.
Having understood the importance and the benefits of International Diversification, let us look on how you can gain exposure into International Equities especially US Equities.
Gaining Exposure to US Markets through Indian Mutual Funds
You don’t need to own a US Trading Account or Foreign Currency Account to gain exposure to US Equities. Indian Mutual Funds offer a convenient as well as law compliant route to gain exposure to US Stocks as well as other global markets through two ways.
- Mutual Funds that own International Equity in their Portfolio: Some Indian Mutual Funds invest a part of their portfolio (up to 35%) in international equities predominantly US Equities to add a global flavour into their portfolio. These funds aim to provide diversification to the investor within a single fund by having exposure to growth through Indian Equity as well as stability through US Equity. Example of such funds include; Parag Parikh Flexi Cap Fund, SBI Focused Equity Fund, Axis Large & Mid Cap Fund, etc.
- Mutual Funds that are designated as International Funds: There are Indian Mutual Funds created with investment objectives to invest in international equities or in overseas ETFs to gain international exposure. These funds can be actively managed funds as well as ETFs and FoFs investing in International ETFs. Some of the examples of actively managed funds include; ICICI Prudential US Bluechip Equity Fund, Aditya Birla Sun Life International Equity Fund. Some of the examples of International ETFs and FoFs include; Motilal Oswal Nasdaq 100 ETF, Invesco India-Invesco EQQQ NASDAQ100 ETF. Do note the funds mentioned here are not recommendations but just examples.
Before you invest :Points to Consider
While international investing has its own benefits, they carry inherent risks too which you should consider before you consider investing.
Regulatory Caps: – SEBI and RBI jointly monitor and cap the investment amounts the AMCs invest abroad. There remains a risk that SEBI doesn’t allow international investments in the future or stop Lump Sum Investments for certain schemes like it has happened recently in the past.
Currency Risk: – While the INR has depreciated against USD over long term, an appreciation of INR against USD or other foreign currency may reduce your returns earned from international investments.
Taxation of International Mutual Funds Taxation on International Mutual Funds remain similar to Indian Mutual Funds wherein LTCG is taxed at 12.5% and STCG is taxed at slab rates. The holding period for long term classification is also similar at 24 months.
Closing Notes
International investing is no longer a complicated task, or an investment limited to a portion of the population. With Mutual Funds, you can get exposure to world’s top companies like Apple or Tesla without stepping out of the domestic investment ecosystem. With Indian Mutual Funds investing internationally; the world is your market – make the most of it.
Disclaimer: The data in this presentation are meant for general reading purpose only and are not meant to serve as a professional guide/investment advice for the readers. This presentation has been prepared on the basis of publicly available information, internally developed data and other sources believed to be reliable. Whilst no action has been suggested or offered based upon the information provided herein, due care has been taken to endeavor that the facts are accurate and reasonable as on date. The information placed on the presentation is for informational purposes only and does not constitute as an offer to sell or buy a security. The Company reserves the right to make modifications and alterations to the content available on the presentation. Readers are advised to seek independent professional advice and arrive at an informed investment decision before making any investment. The EduFund platform & the website is owned, operated and maintained by Helena Edtech Private Limited, a company incorporated under the laws of India. An affiliate of the Company, i.e. Edubillions Tech Private Limited is registered with AMFI as mutual fund distributor bearing the registration number ARN258733. Investment in securities market are subject to market risks, read all the related documents carefully before investing. The valuation of securities may increase or decrease depending on the factors affecting the securities market.
About the author
Niraj Satnalika
Head Of Research,EduFund
Dr. Niraj is a finance professional with 12+ years of experience and is part of the founding team at EduFund. He’s worked with Goldman Sachs, CRISIL and Sakal Media in roles spanning investment management, research and leadership. With a PhD in Finance from IIT Bombay, he brings deep expertise in valuation, governance and education planning. When he’s not teaching or writing, you’ll find him cooking or going on long drives.
