Diversification By Investing Overseas

Posted in Finance Articles, Total Reads: 2645 , Published on 20 July 2014
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Normally investors diversify by investing across industries and different companies of same industry to reduce risk. But advantages of such diversification are limited as all companies in a country are exposed to same kind of systematic risks like high inflation, rising interest rate, currency risk, slowing GDP growth and other economic risks.


For example, in last year every Indian company was affected by slowing GDP growth(which touched a low of 4.4% in 1st quarter),rising inflation(which touched 11.25% in Dec last yr) that impacted consumer demand and hence the corporate earnings. As a result Indian markets performed poorly(in spite of late year rally due to BJP winning state elections).We also saw rupee touching a low of 68.75 to dollar which led to companies posting forex losses.

Image Courtesy: freedigitalphotos.net, renjith krishnan


On the other hand we saw developed markets like U.S,Eurozone,Japan coming out of recession and registering growth.In fact last year was best year for S&P 500,since 1997,which gained 30%.Also MSCI developed markets index performed better than MSCI emerging markets index.Also going forward U.S economy is expected to perform better,as indicated by the fact that Federal reserve has decided to reduce it’s bond buying programme(quantitative easing)by $20 billion per month to $ 65 billion.


All this data point to the need of investing in different countries whose economic cycles and stock market performance are negatively correlated.

For example, rise in crude oil prices will be negative for Indian economy but will be positive for oil exporting nations like Saudi Arabia,Russia etc

Previously Indian investors had limited options,but now he has many options like investing in international mutual funds and even directly in foreign stocks.

Now let us explore the above options in bit more detail:


a)International mutual funds:

It is the best way for a small investor to invest overseas.These funds have been best performing funds among all mutual funds,for the last year with some funds giving returns of even 50%.But going forward we should not expect that kind of return as returns of these funds last year was boosted by severe depreciation of rupee against dollar.


Even though they will provide diversification and an investor should focus on U.S focused funds rather than relying on niche funds that focus on particular markets like china or some themes like mining etc.


It is because U.S companies get large chunk of their revenues from around the world,so investing in U.S companies is proxy for global diversification.


Some key stats about some foreign funds in india are given below(according to data of valueresearchonline)


Fund

Launch

Exepnse Ratio (%)

1-Year Return (%)

Net Assets (Cr)

Birla SL Comd Equities-Global Agri

Oct-08

2.3

3.95

16.16

Birla SL International Equity A

Oct-07

3.22

28.17

87.33

DSPBR US Flexible Equity

Jul-12

2.09

40.45

107.68

DSPBR World Agriculture

Oct-11

1.77

11.23

39.55

DSPBR World Energy Reg

Jul-09

1.77

21.73

137.76

Franklin Asian Eqt

Dec-07

2.75

7.47

150.27

FT India Feeder Franklin US Opp

Jan-12

1.78

51.84

502.27

ICICI Pru US Bluechip Equity

Jul-12

2.95

41.7

192.29

JP Morgan Emerging Eu Mid East and Afr Eqt Off Shore

Oct-10

1.6

4.16

5.64

JP Morgan JF ASEAN Equity Off Shore

Jun-11

1.75

6.61

309.64


b) Foreign stocks

Investors apart from investing indirectly through funds can also invest directly in foreign stocks,though this option is more risky and are more suited to financially savvy investors.Many Indian brokerages have provided this window for domestic investors through tie-ups with foreign trading partners. The Indian broker only acts as the intermediary in this process; the actual buying and selling is done by the foreign broker licensed to trade in that market. Currently, this service is offered by brokerages such as ICICIDirect, Kotak Securities and India Infoline.


At the time of filling the application, investor has to choose the currency in which he wants to settle his transactions. When he trades, the broker converts this currency into the relevant one.


This article has been authored by Ranjoy Bhattacharya from University of Calcutta


References:

1.www.valueresearchonline.com

2.www.economictimes.com



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