We live in what might seem like uncertain times, with the threat of war and in the shadow of a pandemic. But that doesn’t mean your investments should stop growing or that you should stop investing. In fact, depressed market times, hold some of the best opportunities for growth in the long term, as long as the decisions are made with some intelligence and strategy. And one of the best investment strategies to employ now is to sp r ead your investments across a geographically diverse range of market.
SO WHAT IS GEOGRAPHICAL DIVERSIFICATION IN INVESTMENT?
Geographical diversification is the practice of diversifying an investment portfolio across different geographic regions in order to reduce the overall risk and improve returns.The idea behind this is that financial markets in different parts of the world may not be highly correlated with one another. For example, if the stock markets of the developed economies are declining because of recession, an investor may allocate part of a portfolio to emerging economies with higher growth rates or vice-a-versa.
Diversifying your investment portfoliohelps in avoiding excessive concentration into any one marketand significantly reduces the overall level of volatility and exposure to the external factors, thus making the portfolio more balanced and profitable.
It is generally adopted by the companies and the private investors to better manage and mitigate the risk with respect to various geo-political, geo-economic, geo-cultural and geo-climatic factors.Such as a national state of emergency because of war or terrorist activities, political instability,unfavorable currency fluctuations, natural calamities or a black swan event in a particular part of the globe.
WHY IS GEOGRAPHICAL DIVERSIFICATION OF YOUR PORTFOLIO A GOOD IDEA?
1. Taking Advantage of Opportunities in other Strong Economies
EconomiesWith awide choiceof markets across the globe, one can not only choose the right marketto invest in but can also choose the best performing industry with respect to thegeographic location of the market.Therefore,the most significant advantagethat geographic diversification can bring to theinvestment portfolio is toimprove on the return on Investments, by taking exposure in more stable& strong economies elsewhere in other geographic regions of the world.It is generally experienced that geographically diversified investments comprising of a good mix of International portfolios tend to outperform the investments restricted to a particular market.
2. Balancing out the risks
It is critical for any investor to strategize the investment portfolio in such a way soas to mitigate the associated risks to the maximum. It is here that the practice of geographic diversification can become a handy solution for the investors. Geographic diversification provides a much needed balance that all investors strive for.As the investment portfolio is spread across various markets geographically it helps in compensating the unexpected losses occurred in one part by better gains on the investments in other geographies. Also, since the cycles that drive business and investment are experienced at different times in different countries, foreign markets seldom move in perfect tandem with each other thus mitigating the risk.
3. Exchange Rate Benefit
Investing in a country with a stronger currency ensures that you have stronger returns from your investments. You are also protected from any currency freefall or downward swings in your own country, if your international investments are solid.
4. Investing in your favourite companies
Some of the most blue-chips stocks of companies like Google, Facebook, Amazon, Twitter and Netflix, mandate the need to invest internationally. You might also want to invest in the startup unicorns of today, which might become the Uber, Netflix and Google of tomorrow.
HOW CAN ONE GEOGRAPHICALLY DIVERSIFY THEIR INVESTMENT PORTFOLIO?
The practice of geographical diversifications with all its advantages is gaining acceptance and with more & more investors trying to align with the practice,an upsurgecan be seen in the investments in foreign markets.According to data by the Reserve Bank, investments by Indian firms in foreign countries in January 2020 rose by nearly 40 per cent to USD 2.10 billion on a yearlybasis.
This incremental growth in foreign market investmentshas in turn resulted in mushrooming ofmultiple channels which not only provide guidance on processes & procedures involved while making investments in foreign markets but also facilitate the investors in its execution
Some of the most commonly used channels are:
1. Opening an account with Indian Brokers having a tie-up with a foreign broker:
Many full-service Indian brokers like ICICI Direct, HDFC Securities, Kotak Securities etc have tie-up with the foreign brokers.
2. Opening an account with the foreign brokers directly:
A few international brokerage firms like Interactive Brokers, TD Ameritrade, Charles Schwab International Account etc. permit Indian citizens to set up an account and trade in US stocks, mutual funds, etc.
3. Investing in Foreign stocks through new startup Apps:
Apps such asVested Finance&Webullare also new options for Indians investors who intend to diversify their portfolio by investing in foreign stocks.
4. Buying Indian MF/ETFs with geographically diversified portfolios:
This is the easiest approach especially for individual investors to invest in the foreign stocks. Unlike the investors directly investing in the foreign markets, the mutual fund investor is not required to open any overseas trading account or maintain any minimum deposits. Some of the most popular mutual funds trading in global equities are:
Nevertheless, as every coin has two sides,geographic diversification of portfolio has some cons as well.While not major,at the same time it is important that the investor take account of these disadvantages as well and follow a cautionary approach while investing.
Some of the cons of geographical diversifying your portfolio are:
1. Investment in foreign stocks attracts higher charges:
Since all the transactions are in foreign currency, one ends up shelling out little higher as stock brokerage & annual/monthly maintenance charges.
2. All the profits earned from foreign investments are subjected to the currency exchange rate:
This can lead to higher costs from the currency rate exchange.
3. Cap on Foreign investments:
As per the RBI notification in the Liberalized Remittance Scheme (LRS), there is a cap of $250,000 for overseas investments by any Indian resident in one year.
We hope that helped you understand the why and how of geographically diversifying your portfolio. If you would like to know more about which markets to invest in, or discuss how to diversify your portfolio, don’t hesitate to call us at +91 9723554469.
We are an Ahmedabad-based investment and financial advisory firm helping individuals, families and businesses in effectively and efficiently managing their finances, investment and further growing their wealth.