Guide to investing in global markets: 4 main avenues of investing that Indian investors can consider
Prior to 2004, Indian residents had to get approval from the Reserve Bank of India (RBI) every time they sent money overseas because the RBI wanted to limit capital outflows.
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The RBI feared that an excessive outflow of money would destabilize the rupee and cause it to lose value. The RBI was concerned that if everyone started selling rupees and buying US dollars, the value of the rupee would fall and the value of the dollar would rise.
Since the Indian economy is heavily dependent on imports which are paid in USD, the prices of everyday consumer goods would rise and destabilize the economy.
However, the RBI has realized that open cross-border capital flows are important for economic growth. Therefore, in 2004, the RBI instituted a new policy aimed at relaxing controls on capital outflows.
This new policy is called the Liberalized Transfer System (LRS). Under the LRS, individuals can send money across borders without seeking approval from the RBI.
We spoke to Rajesh Cheruvu, Chief Investment Officer, Validus Wealth, and he gave a holistic perspective on what LRS is and the nuances of global investing:
The LRS has made it easier for Indian residents to study abroad, travel and make investments in other countries.
Over the years, the limit for these remittances has fluctuated from $ 75,000 per year to $ 250,000 per year. The LRS limit can be used both for current account transactions such as travel, education, healthcare, etc.
With growing income and wealth, India has indeed seen a steady increase in remittances under this program. It was not until 2015 that there was an explosion in the amounts paid, with an astonishing growth rate of nearly 80% over one year.
While travel, education, and maintenance of close relatives are the categories that dominate the composition of funds disbursed, capital account transactions such as remittances for investments and deposits have been consistent throughout. .
In these abnormal times, remittances did indeed decline, but remittances for investments continued their upward trend.
The fact that the world markets were affected during this period indeed encouraged the Resident Indians to take advantage of such a correction and thus to start investing in other markets, even to rely on their existing investments in abroad.
High net worth clients are consumers of some of the most well-known tech and consumer durables companies.
The rise in the stock prices of some of the world’s largest companies over the past two years, their global reach and the in-person experience of using their services, have fueled investors’ aspiration to be a part. of their growth.
In those days and times today, with the free flow of information in global markets, investors have witnessed the growth opportunities that other markets offer.
Geographic diversification of one’s portfolio is also seen as an important aspect of building a strong portfolio.
While investing in global markets can be a new avenue of investing for most, one should not stray from the basics to follow.
A portfolio should be considered keeping in mind the usual parameters such as the individual’s investment objectives, the investment time horizon, risk appetite, liquidity requirements and other aspects. to consider.
The allocation of assets according to the market scenario is also the key to a good start. For example, given the extremely low interest rates globally, there are very few options to consider for debt allocation.
Beyond that, any increase in global interest rates is likely to lead to capital erosion. It is therefore crucial to seek suitable alternatives for the allocation of debt within a portfolio.
A) Global Equities:
Stocks tend to be the preferred asset class for most Indian investors when it comes to investing in the world. We have seen the domestic mutual fund industry evolve over the past two decades as it has become the preferred avenue for equity investors, especially retail and affluent investors.
When it comes to global investments, we believe that passively managed exchange traded funds are a more efficient way to invest in stocks. This avenue is extremely popular, especially when it comes to developed markets.
The assets under management of some of these ETFs bear witness to this. What makes them attractive is the ease with which investments can be executed just like stocks.
The expense ratios of these ETFs can range from 0.03% to 1.00% depending on sector or geographic exposure and the execution or brokerage fees to invest in these ETFs tend to be very low, like stocks. .
What has contributed to the popularity of passively managed ETFs is the fact that active managers have consistently failed to outperform markets over long-term horizons, especially in developed economies where the market is trending. to be much more efficient.
C) Long-short funds:
For more sophisticated investors, there are long-short funds available which tend to give investors the desired equity exposure in a risk-adjusted manner.
These funds are believed to be better equipped to deal with market volatilities as they have the opportunity to take short positions if they have a negative view of the market or specific stocks.
Please note that these funds are exposed to the market through simple or sometimes complex derivative instruments and therefore tend to fall into a higher risk category. Investors will be asked to understand the various risks associated with these funds before allocating money to them.
D) Alternative investment avenues:
Global financial markets are much wider and deeper for each asset class. This is even more evident when it comes to investment alternatives.
Alternative investments can range from art, insurance, royalty discounting or even legal litigation funding. Some of these alternative investments have almost zero correlation with traditional stock or bond markets and are therefore qualified as market neutral.
As exotic as it may sound, some of them have performed extremely well and the added value of these investments to a portfolio can be seen over time and especially during times of turmoil.
As one can presume, alternative investments are considered to be much riskier compared to traditional asset classes like stocks and debt as they tend to have limited liquidity compared to them.
Emergence of the number of investment platforms:
The increased interest in global investment among resident Indians has seen the emergence of a number of investment platforms facilitating global investment in India over the past two years.
Most, if not all of these platforms tend to have backend-level international broker-enabled interfaces. These platforms tend to be extremely efficient in terms of pricing and execution, making the whole experience seamless.
A peculiarity of most of these investment platforms is that they provide access primarily to the listed US market, and only a few similar ones tend to provide access to markets around the world.
MF investment in global markets:
Traditional avenues of investing have also taken note of the growing interest in global markets and there has been an increase in the number of mutual funds investing in global markets in the form of feeder funds.
In fact, these funds invest in funds domiciled in regions outside India, which in turn invest in global markets.
These offshore funds tend to have a substantial track record in terms of performance and assets under management, which makes the whole proposition attractive, especially for retail investors who wish to take global exposure with amounts of money. lower investment.
Once again, funds investing in US markets tend to dominate the space, although this appears to be changing in the recent past. The structural overlay added to this adds additional prices to investors.
An important point that investors should take into account when investing in global markets is the differential tax treatment of offshore investments, depending on the investment product, structure and route of investment.
Taxation in terms of duration and rate tends to be different from what applies to domestic investments in the same asset class. It will be prudent for investors to consult their tax advisers, to understand the finer details before reaching a conclusion.
(Disclaimer: The views / suggestions / advice expressed here in this article are solely by investment experts. Zee Business suggests that its readers consult their investment advisers before making a financial decision.)