Indian investor, do not miss out

Indian investors are missing out by ignoring wealth-creating assets from across the globe.
By Morningstar |  17-08-21 | 

Akansha Singh, associate director of managed portfolios, and investment analyst Mohasin Athanikar, make a compelling case for Indian investors to start allocating a portion of their portfolio to global markets.

Did you know? The largest companies of the world, which invariably are market leaders in their sectors, can be accessed only through international investing.

When it comes to global market capitalization, the U.S. leads (42% share), followed by China (10%) and Hong Kong (6.2%). At 3%, India is way behind.

As per Fortune magazine’s Global 500 for 2020, which ranks companies by their revenue-generating capability, only eight Indian companies make the cut with Reliance Industries topping the list, with the 96th spot.

Did you know? The representation of new-age businesses such as technology, healthcare, media and communication services are low in the representative Indian benchmarks.

Globally, these sectors constitute a much larger piece of the investable market. For example, the combined share of these new-age sectors in the NSE 500 is 21.62%, whereas they constitute more than 41% of the MSCI All Country World Index. The latter is a benchmark representative of the global equity investable universe.

With the pandemic further highlighting the importance of these sectors, they are now an essential part of an investor’s portfolio. Yet, most cutting-edge opportunities for investing in these sectors lie in markets outside India.

Did you know? While Indians make a significant contribution to the revenue growth of certain companies, they are not participating in their earnings growth.

Trendsetter companies such as Facebook, Netflix, Amazon and Google are rapidly changing the world as we know it. Although they have a global footprint, Indians are a large – sometimes the largest – group contributing to their growth.

As of April 2021, Indians were the largest audience for Facebook at 330 million users, which is much larger than the U.S. audience of 190 million.

Indians as a group have 95.45% of their desktop search traffic originating from Google (October 2020).

Did you know? A growing school of thought links innovation – both product and financial – as a driver of investor wealth creation.

Innovative products and services are often responsible for the disruption of established business models and creation of new markets where disproportionate revenue-generating capability lies with the disruptors. As a result, such disruptors often emerge as global market leaders.

Consider Netflix, which in the late 2000s switched its business model from renting out DVDs by mail to a video-streaming service, which changed the way millions of people spend their free time. Although many service providers followed in this sector, Netflix remains the leader by a wide margin. The rise in its subscriptions, especially outside the U.S., has led to significant wealth creation for Netflix investors over the years.

As per the 2020 ranking of the Global Innovation Index, India ranks 48th. The top spots go to several European countries and the U.S. To benefit from the innovation culture in these countries, it is important for Indian investors to diversify globally.

How can Indian investors participate? Invest in stocks.

The Liberalised Remittance Scheme is one such way.

Individuals can buy shares of foreign companies directly, but would need to route their investments through specific broking houses. Many Indian broking houses have tie-ups with foreign brokers towards this end.

If investing directly, please take note of the brokerage costs, the costs of currency conversion and the cost of opening and maintaining a demat account. Also, ask about the tax implications of investing in the country abroad and India. And, if you have to claim a refund under the Double Taxation Avoidance Agreement. Do take into account tax on dividends.

How can Indian investors participate? Invest in mutual funds.

The increasing availability of overseas fund-of-funds offered by mutual fund houses, is a much more convenient avenue. Make a lumpsum investment or opt for a systematic investment plan, or SIP.

How must you decide?

Plenty of parameters. Geographical exposure (European). Country specific (China, Brazil, U.S.). Global (investments spread across the globe). Thematic (emerging markets, agriculture, mining). Active ETFs. If active, a feeder fund or a domestic fund that invests directly abroad?

Some mutual funds invest directly in U.S. stocks, such as ICICI Prudential US Bluechip Equity. Others like Invesco Pan European Equity and PGIM India Euro Equity are focused on Europe but feed into a global fund.

Parag Parikh Long Term Equity invests in global and domestic stocks.

ABSL International Equity invests directly in stocks across the globe. Ditto with PGIM India Global Equity Opportunities that feeds into a global fund.

ABSL Global Real EstateDSP World EnergyDSP World MiningDSP World GoldDSP World Agriculture are some thematic options.

There are passive options too – Motilal Oswal Nasdaq 100 and Motilal Oswal S&P 500.

Investments in global funds are taxed like fixed-income instruments; 20% post-indexation for long-term gains and at marginal tax rate for short-term gains.

Do check the expense ratio too.

Finally, the decision as to how much of an exposure your portfolio should have to global stocks, is a very personal and subjective issue. It could range from 10% to 25%.

The list of funds mentioned above is not exhaustive. Neither are they recommendations. They are purely for illustrative purposes. 

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