Diversifying Our Investments Abroad
Sometime back we had put out an article on why diversification is important. Read to know more
The primary aim of investing is to grow my money and make it work harder for me. That means firstly focusing on avoiding negative returns, keeping funds safe and only then planning for gain. Diversification is what helps to grow money with a lower risk of losing. A portfolio that is well-constructed not only ensures participation during market rallies, but also helps in downside protection. We would like to put out an addendum to this that Investment portfolios are also subject to legislative risks decided by the government.
The government can amend rules and regulations or even bring in new laws and there is a possibility that our investment strategy and portfolio could be impacted. Some examples that have impacted our investments include demonetization, extending the tenure of long-term investments for debt funds from one year to three years, and abolition of wealth tax, estate duty, Land Ceiling Act and Gold Control Act.
Till a few years ago, Indians did not have ways and means to deal with legislative risks as these have mainly been sudden moves. Also, as investors, we had no say on the developments. However, with the introduction of the Liberalized Remittance Scheme (LRS) in the year 2004, the situation changed. According to the current provisions, a resident Indian can invest up to $2,50,000 per year outside India. Barring a few countries, the funds can be invested in most parts of the world.
Always remember that risk and returns are two sides of the same coin. Whenever we see good returns, there are also risks associated with it. When we invest only in India, all our eggs are in one basket. If our portfolio — equity, debt, gold, real estate and other forms of investments are only in India and in a single currency (INR), any legislative development will impact all these investments and we will have no control over it. It is important to diversify investments to reduce risks on the portfolio.
Now, in India we also have mutual fund schemes that can invest a corpus outside the country. These schemes were also considered to mitigate the risks.
Never make an investment that promises ‘extra ordinary returns’ by taking advantage of loopholes in the existing regulations, as the government might go on to plug those. Worse… penalize you for your proactiveness. ~ Mimi Partha Sarathy
To avoid legislative risks, investors diversify their investments across countries and avoid making money from “loopholes in the system”. Legislative risk is a systemic risk and cannot be avoided. Investors can only take steps to reduce the risk.
Diversify across Geographies
Many Indian investors deployed money in foreign funds over the past two years. And rightly so as per them.
In the COVID-19 pandemic, we saw various nations going through various phases of recovery. Last year, the Indian economy was recovering fast, while Europe and US were battling with the COVID-19 surge. Now, the Indian economy would have faced a lock-down if the 3rd wave had hit while the US was doing better. Diversifying overseas helped reduce country risk and also help us to invest in businesses that are not available in India . Some developed markets share low correlation with Indian stocks.
The key to growing your money and achieving financial success is Asset Allocation. Reviewing and subsequently rebalancing your assets is a must. They help you achieve your financial goals. Portfolio diversification is achieved by investing across asset classes, across fund management styles, across time, & even across geographies. But most importantly they will be derived from the asset allocation master plan which is in turn derived from the financial plan which is dependent on the financial goals that you have set. Have you spoken to certified planners to take their view on what kind of portfolio diversification you will require?
Further reading
Investors should diversify portfolios
