/Overseas markets: Should you invest directly or through mutual funds?

Overseas markets: Should you invest directly or through mutual funds?

By Srinivas Rao Ravuri

We are living in an increasingly globalised world. As an Indian consumer, we have benefitted from the availability of a variety of high-quality goods and services that are produced outside India — be it mobile phones or luxury cars. Globally, there is a lot of innovation taking place that is impacting our daily lives. Various industries are facing disrupting, and it will impact your investments.

At this point, very few innovators are listed on the Indian stock markets. India may be the fifth-largest economy, but our market cap is about USD 2.1 trillion, while the market capitalisation of the rest of the world is USD 90 trillion. That means, if you are not invested in global markets outside India, you are ignoring an opportunity that is roughly 43 times bigger.

Investing entails risk. Risk cannot be eliminated, but it can be reduced by diversification. Diversifying investments across asset classes, and within the asset class is key to manage risk.

Investing in global funds/stocks also helps you get the benefit of rupee depreciation. Over the last 35 years, the rupee has depreciated by an average of 6%. So, if you are planning for your daughter’s or son’s education abroad a few years down the line, you will have to account for higher cost due to the rise in fees and depreciation of the rupee.

Global investing is relatively a new journey for the Indian investors. This journey is almost akin to the journey of an investor investing in equity MFs. We now have a segment of investors who have invested over the cycles and are comfortable with MF as a concept. They are moving beyond the regular conversation and are now engaging with their advisors on strategies to diversify beyond equity and debt predominantly to diversify, take advantage of currency as an asset class and participate in global businesses that do not have representation on the Indian bourses.

As more people appreciate the fact that the source of market volatility can emanate from anywhere in the world and the only way forward is to diversify portfolios in as many asset classes as possible, international investing will gain traction.

Now, let us address the pros and cons of investing in global equities via mutual funds. Investors have two choices. One, investing directly in global equities. Two, investing via mutual funds. Investing directly in global stocks has advantages. For example, an investor can run concentrate portfolio of select stocks (anywhere from a single stock to about ten stocks) based on his understanding, comfort and acumen. He has complete control here and this may appear to be an easy option, but it is so only for a seasoned investor with reasonable resources and time.

In addition to the capabilities to identify and monitor global events that would impact his stocks, an investor should also have the bandwidth to deal with compliance and regulatory issues. For example, it is mandatory to provide exhaustive details of foreign assets held by investors in Schedule FA of the income tax returns (ITR) form. Also, there is a limit of USD 250,000 per person per annum under the Liberalised Remittance Scheme (LRS).

Whereas investing in a mutual fund (international fund of funds or feeder funds) has many advantages like:

  • Treated as a domestic fund: investments in these funds are treated like investments in any other domestic fund, there are no additional regulations as the case with investing in stocks. At the same time, investors get currency exposure, too.

However, there are few disadvantages of investing via mutual funds, like lag of a day for applicable NAV, currency risks, long-term capital gains tax for less than three-year holding.

Finally, as you can see, investing in global equities through mutual funds is a superior option for retail individuals than investing directly in foreign stocks. Most advisors opt for diversified equity funds for the first-time investors in equity, here also going with strategies that are investing across the globe should be the logical first choice. Sophisticated high net worth investors with the resources and wherewithal to manage all the reporting and research, can supplement these rupee-denominated global funds with direct stocks or other equity options available to them under the LRS route.

(Srinivas Rao Ravuri is CIO-Equities at PGIM India Mutual Fund.)

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