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Why you should consider overseas diversification of your portfolio

In India, our grandparents and parents have inculcated the trait to diversify in us from our childhood days. Whether that’s studying MBA post an engineering degree for a secure future or having three types of dried fruits on the serving plate when guests come over – we know how to diversify.

Really though, Indians know what it means to not put all the eggs in the same basket. Just have a look at the typical investment portfolio of the past generations in the country – you will see a good mix of gold, real estate, cash reserves, and other investment classes. But what does it mean to have a solid, diversified portfolio in today’s time? Let’s find out. 

Current scenario of portfolio diversification 

Today, in the space of personal finance, many investors think that diversifying one’s portfolio only applies to the choice of stocks – large, mid, or small-cap. However, if you consider their performance, it has been disappointing, to say the least. The 10-year returns on the Nifty 50 index, without much volatility, are 9%, which is very close to the pre-tax returns on a Fixed Deposit (FD) at the start of the decade. 

Another popular option to diversify, which has become the go-to option over the last decade, is mutual funds. This is because mutual funds offer simple and easy diversification of your portfolio. However, even in mutual funds, as per Mint analysis of Best funds dated Aug 03, 2020, the 10-year returns on various categories of funds are unexciting – barely enough to give a positive yield post-long-term inflation average adjustment.

In this scenario, it’s necessary to explore overseas/international diversification. While it currently remains a largely unexplored territory with Indian investors, it’s a strategic investment move. Let us evaluate a scenario of investing in the U.S. securities market.

Why should you invest in the U.S. securities market?

  • The U.S. securities market is home to the most innovative companies which are likely to define the future. Think of ground-breaking categories such as gene-editing CRISPR technology, AI, OTT, etc. Long-term exposure to this plethora of stocks is likely to yield positive returns.
  • As per Outlook Money, in the last five years, the NASDAQ has generated a return of 21% which is in sharp contrast to single-digit returns in the Indian stock markets. These gains can largely be attributed to big tech majors i.e. Amazon, Alphabet, and Microsoft, making it an ideal hedge for domestic investors.

    Investment in the U.S. securities market offers cross-currency leverage. The weakness of the rupee against the dollar further enhances the returns from these investments.

    U.S. and India have a Double Taxation Avoidance Agreement (DTAA). It is a tax treaty that protects Indian investors from the burden of paying tax twice on the same income.

To what tune should you invest in the U.S. securities market?

Practically, there is no one straight answer to this question. It is a function of your financial goals, risk appetite, length of investment horizon, etc. However, having established the need for investing in the U.S. securities market, let’s explore how conservative and moderate allocations would look like if investments were made in 2010.

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What does it mean for you?

The table above, in an extremely simplified manner, gives you an idea about the potential gains from the U.S. securities market. The returns are not even adjusted for the intrinsic growth in the dollar in the last decade. But what is in it for you? As stated at the beginning of this section, investment decisions are personal decisions, so these gains would have meant different things to different investors. 

For some, it would have meant pre-closure of the home loan, for others it may have meant an exotic family holiday or simply cash reserve for the unexpected rainy day called COVID-19. The question now driving home here is, “Are you really diversifying if you are not considering overseas investments?”

How can you invest in U.S. markets from India? Appreciate Wealth is on a mission of making global gains accessible to all. You can invest in the U.S stock market through the convenience of your mobile phone. Simply log on to Appreciate Wealth and sign-up to explore more about such possibilities.

Team Appreciate

Team Appreciate