Mutual funds a good way to begin global investment journey: Ortium Fin Director

Many personal finance pundits think that investing in the foreign market leads to a wider spectrum of opportunities. However, that's not without challenges. It doesn't possibly take much to be an investor, but some diligence and astuteness are certainly needed to become a profitable investor. Investment objectives, costs, returns and risk-taking capacity - they all matter in this journey.

Having said this, there is no doubt whatsoever that there are far greater opportunities abroad. For instance, those investors, who want to test the international waters prefer global mutual funds to start their global investment journey. These funds are typically invested in the assets outside the home country. These funds become free from any domestic disruption and therefore give diversification and promising returns. At least that's what Sparsh Kaeley, Founder and Director, Ortium Financial Services Pvt Ltd, a Mumbai-based AMFI registered mutual fund distribution company, feels. Speaking to Bizz Buzz exclusively, Kaeley decodes the whole business of investing abroad - the ways, the prospects and the challenges

How do you logically justify the proposition that investing abroad offers far greater opportunities?

India is about 4-5 per cent of the global market capitalisation. In other words, a global stage offers you 20 times more opportunities to invest in. No wonder, there are only two companies in India that make their way to the top-100 in the world (TCS and Reliance). If you look at the top- 10 companies in technology, health care, consumer, commodities and financial services, all are listed outside of India. If you were to evaluate the top-100 companies in the last 5 years, the real growth has been driven by technology. The five biggest technology companies are part of the NASDAQ and if you invested only in India, you have missed the tremendous growth that these companies delivered. These are popularly called as FAANG stocks – Facebook, Apple, Amazon, Netflix and Google.

Can Rupee depreciation add to one's returns?

The Indian Rupee has been depreciating steadily over the last few decades. This has contributed to one's overall returns. Rupee depreciation alone would have contributed over 4 per cent per annum to your investment returns over the last two decades.

I'm not talking about the pandemic period. But normally, these days, people spend a lot in foreign currency - for education, vacation and so on. So does it make sense to invest at least a part of this likely or actual foreign currency expenditure into global markets?

Many investors have expenditure to be done in foreign currency. It is not just on foreign holidays, but also on education. A three-year under-graduate degree can cost almost $150,000 to $200,000 (including costs of tuition, insurance, lodging, boarding and travel). There is a growing trend for people to study in IB or IGCSE curriculum in India. Even if you are paying your fees in local currency, part of it has to be remitted as Royalty to the institutions that manage these programs. Obviously if the Indian Rupee depreciates, you would have to shell out that much more for these fees. So if you have expenses in foreign currency, it makes sense to invest a portion of your investments globally.

But there are the psychological barriers to investing overseas. Isn't it?

There is a lot of research that shows investors have the tendency to generally invest in their home countries as they are very familiar with the investment options here. This is termed as home bias. You may believe that it is less risky to invest in India just because you are familiar with the markets here. This bias becomes even more pronounced as India is seen as one of the favourite markets for global investors to invest in. However, investing all your eggs in one basket may not be the best idea. While we do derive a lot of comfort investing in India, many stock markets overseas have outperformed India in terms of returns, while at the same time having very different geo-political risks compared to India.

You would certainly appreciate that investing abroad is not without challenges and risks. So what are the potential risks of investing overseas?

We have shared a lot about the advantages of investing overseas. Now, let us look at some of the risks associated with overseas investing. We will focus only on overseas equities as most investors consider investing in them.

First, equity markets by nature are very volatile. All risks that apply to Indian equities also apply to overseas equities. At times, you may witness significant erosion in value in the short run, though equities do well over a long term horizon. Hence, you need to have at least a 7 to 10 year horizon for investing in overseas equities as well.

Second, you carry a currency risk as well. Currencies can move in your favour or against you. Hence you need to keep in mind the additional risk due to currency movements as well.

Third, you need to consider the country risk. This is more critical when you invest in funds that have significant exposure to a single country. By the way, this is also the reason you need to consider overseas investments as by Investing only in India, you are exposing yourself significantly to country risk. But as shared earlier, your home bias leads to a perception of lower risk while investing in your home country.

Fourth, you need to be aware of risks associated with trading in global stock exchanges. The trading and settlement rules of those stock exchanges will apply and hence you need to be familiar with all the challenges of trading in these stock exchanges. However, investing via Mutual Funds solves a lot of this headache.

What is the best way to invest in the overseas markets?

There are several ways to access overseas markets. In my view, the best way to invest overseas is to invest through mutual funds. The Indian mutual fund industry has evolved significantly when it comes to investing globally. The biggest category of funds that invest overseas are in what we call Fund of Funds (FOF). In a FOF, you invest in a fund where the fund invests 100 per cent in another fund instead of owning direct stocks. You get the benefit of investing in funds that are managed by the best of international fund managers. You also leverage the local research capabilities of those funds. Further, many of the underlying funds have long-term track records and hence you can evaluate these funds better.

Today, you are spoilt for choice. There are funds that invest in the leading global indices like the US S&P 500 or NASDAQ. There are funds that invest in specific countries or geographic regions. There are funds that buy into specific sectors like technology, energy, commodities or consumer. There are over 40 mutual fund schemes that you can choose from.

Another big reason we prefer mutual funds is that the compliance burden on a domestic investor is minimal. One can invest abroad without worrying about additional tax filings, FEMA Act, Converting currency, etc. All these are taken care of by the mutual fund company.

Let me now come to the most pertinent question: How much should one allocate to global investments?

The decision on the right amount for allocation depends on several factors. First, how much are you spending or likely to spend in foreign currency? For individuals who are considering relocation overseas or are funding education of their children overseas, then you can consider a far higher allocation to overseas investments as compared to individuals who are investing only to take advantage of opportunities or add diversification of their portfolio. Second, your familiarity with overseas investing that matters a lot.

If you are just starting out, then you must start small! Once you get used to overseas markets you can increase your allocations. To make any meaningful impact on your overall portfolio, you need to allocate at least 10-15 per cent to global investments. This will ensure that you have significant exposure to some of the best companies in the world and participate in their growth story.