International investments have always been intriguing and exciting to Indian traders who were only exposed to Indian stock market nuances. This was until a few years back though. With diminishing geographical barriers, thanks to technology, awareness about global businesses, economies and politics have increased drastically. If you are looking to add international stocks to your portfolio, here are some basics you need to know.
Why Should Indian Investors Add International Stocks to their Portfolios?
1. INR returns over the last 10 years
When we look at the INR returns of various geographies over the last 10 years, there have been several geographies outperforming the Indian equity market returns while some of the best returns have been from investing in the U.S. markets. 2021 YTD returns on the S&P 500 index has been over 26% which is also higher than the BSE Sensex returns of 21% YTD 2021. So, global exposure helps Indian investors to maximize their portfolio returns with a diverse mix of geographies. A look at the image below will throw light on the INR returns over the last 10 years.
Additionally, Indian equity markets have lower correlation with other equity markets which is likely to lead to diversification and eliminating country risks.
Correlation of Indian Equities vs. other economies
2. Currency appreciation and returns
INR has depreciated against the USD over the last few years and when the Rupee depreciates the value of the foreign assets increases. This is also a reason why adding international stocks to the portfolios have largely benefitted Indian investors. The chart below shows the value of 100 which has changed over the last 10 years due to the depreciating rupee.
3. Adding international stocks gives exposure to trending themes globally
Some of the disruptive themes for 2022 include AI, Cloud, E-commerce & digital life Metaverse etc which will come to the advantage of investors that expose themselves to global stocks. The digital economy landscape illustrated below gives you an idea of the several disruptive themes in the digital space for example.
Ways To Build a Global Portfolio
Increased exposure to global brands has led to an interest in investing in brands that are used every day- Amazon, Facebook, Google and the likes. This trend has influenced even the passive investors to create a portfolio that could give them
- Wider Asset options
- Portfolio Stability
- Geographical diversification and
- exposure to trending themes globally
However, markets like the U.S. can seem relatively precarious and risky to new investors who have not forayed into global markets, nor have the necessary guidance to successfully derive the benefits of a geographically diversified portfolio. Here are some ways in which you can build your global portfolio or add foreign stocks seamlessly to your existing basket of securities:
- Understanding and assessing your risk appetite is foremost while investing in the global markets. Just like shares and markets across the globe, every investor is unique and is different from the other. While being extremely promising, global markets can be subject to triggers different from those of the home country. To understand your risk appetite:
- You should carefully understand your financial situation: expected income in the upcoming years; expense-saving ratios; and long-term goals as an investor. Further, you can classify yourself as a High Risk, Moderate Risk and Low-Risk tolerant investor.
- You can also take into consideration your purchasing power and career movements which might have an impact on the actual risk tolerance. If you have an oscillating income, you might be less risk tolerant in comparison to those who have a relatively fixed income monthly or annually.
- Knowledge about the markets, familiarity with market triggers and performance of the economy of the country you are investing in, will also help you create a better idea about how risk-averse you can be and to what extent your portfolio can be exposed to global markets.
- Choosing stocks that you understand and follow can help reduce ambiguity. Investing in an unknown market can often be a daunting experience at first, especially if you are a novice. Upon mapping your risk appetite, you would also be able to understand the companies you like and follow regularly better.
- The key here is familiarity. It is wise to select a basket of which you understand the businesses of. It becomes easier to make day-to-day trading or investing decisions more wisely in events of market fluctuation.
- Read about the company, its past performance, its future growth outlook, management guidance and other key financials to understand its growth potential over a period of time and the impact of market influencers like The Fed or Elon Musk.
- Once you are familiar with a set of companies you can start investing in them and slowly progress to a basket of stocks, or ETFs, or even passive funds with low risk like the Index funds, to better understand new markets that allow an investor to cash in on the potential gains of being exposed to global markets.
- The next crucial step is to examine and assess the profitability/gains of your foreign stocks vis-à-vis the existing assets in your basket: Indian Investors are always advised to dedicate 10-15% foreign stocks as a part of their portfolio, especially if they are new to trading in global stocks. This percentage can then be adjusted according to the investment experience and the suggestions of your investment advisor.
Periodically assessing the performance of the stocks in your portfolio can help make sure that you are on track to achieving your financial goals. Intermittent reviews can also help you assess and fine tune your asset allocation strategy. Irregular patterns can lead to your portfolio becoming too aggressive or conservative for your risk profile, actually decreasing the likelihood of you reaching your goals.
- Analyzing the long-term performance of your portfolio helps in better planning: Investing requires one to make decisions on events that are yet to happen. Hence one must carefully analyze the performance of each of the assets in the portfolio, match it to its previous performance and try to estimate probable earnings in future.
While investing in equities, investors need to understand the time value of money. The longer you hold your portfolios with good and fundamentally strong companies, the higher the benefits. The returns of a long-term investor who holds his portfolio for 10 years to 15 years has seen greater returns than investors who exit for short term gains. This is the case with not just equities but also in terms of ETFs or any funds with a goal of being invested for a long-term.
Venturing into a new market can be a different experience from time to time as it depends on pertaining market conditions and economic cycles at the time of initial investment. However, one must avoid penny stocks and invest in shares that tend to rise due to speculative play (momentum stocks) by other traders in the market.
For first time investors, investing in Stacks, which contain an expert-curated portfolio of sector-specific, blue-chip company securities, renewable stocks or risk-specific stocks can help them analyze their perfect asset mix for successful investments in the global markets. The overall goal of the investment must be to learn about various markets and how they function in order to derive maximum benefits from investing in a variety of companies listed in different stock markets.