ICICI Securities, Motilal Oswal, Zerodha, Kuvera… Be a full-fledged broking house or a discount broker, all are by and large very aggressive and contending to offer foreign trading facilities at negligible cost. With respect to new age platforms like Vested Finance or interactive brokers, savvy investors are jumping in to tap this opportunity. In this article, we are going to discuss Investor Perceptions of Foreign Market.
We should rewind back to 2009, where the number of individuals searching for foreign investments was appallingly low. Poor investor participation led brokers to believe that they were fighting a losing battle. One can contend that India was the hot investment destination after the subprime mortgage crisis and hence, individuals were being incredulous “Why go foreign destination when there are gigantic investment opportunities locally?”. However, with time, this perception has changed, so did the bias for investing in the home country.
So, what brought this radical shift in investor’s behavior in the last 12 years?….
Changing Investor Perceptions of Foreign Market
Welcome to 2021, the year which shook the world and India was no exception.
It’s facts that Indian business sectors can possibly generate superior returns yet have they truly outperformed our dear S&P 500 Index?
This diagram clearly shows how S&P 500 index has comfortably beaten the Nifty 50 over the last 10 years. Additionally, the Indian equities have seen much more instability in returns throughout the years compared with US Market.
The rupee has devalued by practically 5% consistently compared with the US dollar. Depreciation would itself be able to have a long-term impact on your funds as everybody is spending in dollar terms today. Who doesn’t prefer to have a cool I-phone unit or like to enjoy a foreign holiday, or educate their children abroad? This highlights a reality that being ardent purchasers of worldwide items/benefits, it’s vital to hold some extent of your investment in dollars.
People want to invest in their future
Apple, Google, Netflix, Facebook, Tesla, and so on are the brands that everybody needs. Why? Since these items have become a part of our regular lives. With technology and innovation comes high growth potential guaranteed by these top companies. In this way, going gaga over them is the new normal, particularly for millennials who are gauging high returns over risk.
The Impact of Pandemic- COVID 19
Throughout history, certain occasions drive us to follow a trend. In 2020, this trend transformer was COVID – 19. The pandemic has taught us to assess the risk and opportunities accessible in worldwide investing in a better way. All in all, the focus has moved to make an “All Weather Portfolio” which can stomp out such occasions.
“All Weather Portfolio” is a term introduced by Ray Dalio of Bridgewater Associates, the world’s biggest hedge fund. It basically means a diversified blend of securities. Now, diversification can be of different sorts:
- Across Asset Classes: Across Asset classes imply money can be allocated in various asset classes like Equity, bonds, real estate, or gold. And within asset class refers to picking distinctive investing instruments like ETF’s or Mutual assets, FD’s, etc.
- Strategy Diversification: With asset classes also, one can follow a strategy like Value investing, Dividend investing, Growth investing, Bluechip Stocks, etc.
- Industrial Diversification: It means investing in companies across different industries to reduce the risk of cyclical imbalance.
- Geographic Diversification: Investing across countries like buying real estate in India and the US or, buying bonds in India and buying Equity in the US or other foreign countries. Basically, getting the best of the world markets to achieve portfolio returns and risking out the abnormalities.
Over the years, we have seen that diversification across asset classes is generally perceived by all. In any case, geographical diversification is the one that is known to all but not done by anybody. The need for going worldwide is more applicable now as the economy is getting more associated with each other.
Getting back to our point, how can Geographic Diversification be a game changer?
Let’s see how US Markets has performed respect to Indian Markets during and post Covid.
The market crashed under the Covid pandemic on 20th Feb’2020 and the downtrend finished on 7th April 2020. It was one the quickest fall in financial history flagging the start of another recession. During this time, if we compare S&P 500 Index and the Nifty, we saw panic selling occurring in both markets. In this case, the Nifty smashed by 27% while S&P 500 fell by 21% approx.
One can contend that markets have smashed all around the world, then why should we trust Uncle Sam? All things considered, the catch here is the INR Dollar value appreciation. In this year, Dollar has appreciated by 4.6% with respect to Indian rupees which implies as the dollar appreciates in worth, so does your portfolio return. This further makes Geographic diversification a smart investment decision, particularly in volatile situations.
Despite encouraging returns and versatility showed by US Markets, just $431 Million was invested by Indians to the foreign market in 2019-20 which is a pitiful 0.1% of India’s total financial wealth. The primary deterrent being the difficulties looked at by investors in terms of brokerage, tax collection structure, and capital allocation among others.
New age platforms like Vested Finance, Winvesta, etc are bringing the barriers down with the introduction of offers like Zero commission trading and Fractional share investing. Fractional ownership of shares is a process that permits investors to purchase fractional portions of stock.
For example: If you want to purchase a stock of XYZ Ltd. Which has an offer cost of $50. But you have only $25, then you can purchase half of the stock if your broker offers the facility of fractional ownership. This type of owning fractional shares is known as dollar-based investing. You can allocate the amount you want to invest and purchase the shares depending upon your capital. When you purchase a fraction of a share, you will be treated as equivalent to any investor with a full share. You make a similar rate of gains and also share a similar rate of risk.