Look around you. There are a number of products and services from across the globe, that have found their places in our homes, offices, and everywhere else. Right from ordering a Samsung phone on Amazon, to watching films and documentaries on Netflix, to staying connected with friends, family and colleagues through WhatsApp, businesses have travelled far and wide in order to serve demand across the world. We’re global citizens, surrounded by global companies. So, why restrict our investments within our borders? Why not invest in the growth of the world, while continuing to invest in the growth of our country?
Now, you might wonder, what’s so great about an investment strategy that pumps money into foreign companies?
Well, to begin with, the best investment decisions come from truly knowing the company that you’re investing in. If you’re using a particular product, you know what’s good about it and what’s not.
“You don’t have to be an expert on every company, or even many. You only have to be able to evaluate companies within your circle of competence. The size of that circle is not very important; knowing its boundaries, however, is vital.”
Warren Buffett
What’s Mr Buffett talking about?
Each of us has a different circle of competence that we may develop through our experience and interests. It may reflect in the products we consume, the hobbies we have, the sports we follow, and the world problems that we wish to solve.
I love Nike as a brand. Not only do I wear the shoes they make, but I also use their mobile app when I go on a run. In slightly technical terms, what I’m doing is a qualitative analysis of Nike’s products and services. This knowledge helps me when making an investment decision.
As another example, let’s say I want to invest in Tesla because I too, want to do my bit to reverse climate change, and those are exactly the values that Tesla is working with.
When our values and circle of competence influence our investing decisions, it’s called value investing. Pretty straightforward, eh? And because our lives are filled with a mixture of products and services from within and outside the country, doing this becomes easy.
Value investing, though, isn’t the only reason why we may consider investing outside India. There are other reasons as well.
More Reasons to Invest Globally
To give you a bit of a background, there are 60 stock exchanges in the world. These exchanges are where companies, like the ones we’ve discussed so far, list their shares for the public to invest in. Monetarily, the US market makes up around 55% of the global stock market, while the Indian market contributes around 3%.
Investing in global companies is a great way to diversify your portfolio and reduce volatility. In most situations, the US market barely reacts to disturbances in the Indian market. So, let’s say the Indian stock exchanges witness a plunge, the US exchanges might still look strong.
The additional gains due to the depreciating Rupee is another factor to consider.
I’ll explain this with an example. Say I invest ₹1000 to buy shares of Alphabet Inc. in January. At this point the $ was at ₹71. Now, when I sell these shares in October, not only is there an appreciation in the share value, but there’s also a change in the Rupee-Dollar exchange rate. $1 is now worth ₹73! This means, due to the depreciation of the Rupee, I earn ₹2 more for every $1 I sell. But of course, the reverse is also possible. And that is the risk involved.
Remember the qualitative analysis that I did of Nike earlier? Ideally, the next step in making an investment decision would be to do a quantitative analysis as well. I can do this by looking at their accounts, checking their profits over the years, their competition and so on. But let’s say somebody does this on your behalf, an expert, trained to do this kind of analysis, the results of which are all positive. Would I not then readily invest in Nike? Yes, I would, without a doubt.
This brings me to the how aspect.
How do I really go about investing in the global market, and who is this expert?
There are two ways to invest in foreign companies:
- Directly in shares through the stock exchanges
- Via Mutual Funds that in turn invest in these companies
This first option is possible under RBI’s Liberalised Remittance Scheme (LRS). As per this scheme, a maximum of $250000 can be remitted outside India per year. This limit includes any amounts remitted for education, travel, or other foreign transactions during the year.
The second option is the one I’d recommend, especially when you’re just starting out.
Mutual funds offer a great amount of flexibility at reduced risk. And this is where the expert comes in. There are plenty of mutual funds offered by different fund houses that invest internationally. Some of these funds invest in the US, some invest in countries like Japan and Vietnam, where there’s high potential for growth, and some others are focused on specific sectors like energy and technology. As with any other mutual fund, you can check the portfolio to see exactly which companies the fund invests in, understand the risks involved and then make your decision.
Our take
The international mutual fund investments are on the rise. While a few funds invest wholly in companies abroad, many more invest in a mix of Indian and global companies. Personally, these are the ones I’d pick. And I’d ensure to cap these global investments at 5% of my total investments, so that I’ve diversified, but not too much.
We know through our own experiences with organizations whether we think they’re promising or not. Apple has millions of loyalists the same way Maruti does. So, investing in the growth story of a company that we look up to can be both satisfying and rewarding, both in India, and beyond.
