Diversification in investing means spreading your risk across different assets. If you are an equity investor, don't stop at just Indian equities. There are stocks listed in other countries too which merit some attention. But before adding assets in another currency to your portfolio, think through the pros and cons.
Benefits of investing in international assets
Adding international assets can be done in the form of stocks or you could buy bonds of overseas companies, currencies or even property. While liquidity surplus globally has insured some linkages between financial markets in different economies, the return trend in assets from different countries is still varied.
Geographical diversification helps retain a balance in earnings when financial markets in your country are depressed. Historical data shows that while India equities tend to outperform in an uptrend, when there is bearish sentiment, they almost always fall much more than Europe- and US-based equity indices. By having exposure to the latter, you can smoothen out some volatility in returns.
Then there are years like 2013 when global indices like the MSCI Europe and the S&P 500 were up roughly 25-30% and BSE Sensex fell around 2%. Diversifying across geography can help protect the downside in your portfolio.
The other advantage is investing in global companies that are not listed in India. Also, since the rental yield in some overseas markets is higher than the 2.5-3% in most big Indian cities, it may appeal to you to buy property overseas and add regular rental income to your portfolio.
Similarly, you can add currency or bonds in other currencies.
What you need to be careful about
Under the Liberalised Remittance Scheme, you can invest up to $2,50,000 in overseas assets or about Rs1.65 crore in today's value. You also need to be conscious that you will be investing in a different currency and a change in exchange rate in the duration of your investment will impact the final return.
While you can hedge the currency exposure, the hedge itself will also cost you. So, if the Indian rupee rises in value against the currency you have invested in, during the period of your investment, it will hurt your returns when you convert it back into rupees.
With physical assets like property, you also have to be aware of the taxes and duties that need to be paid in the country where you are buying the property.
In some countries, for example, a minimum property maintenance standard might mean that your expenses are ultimately higher than what you had initially expected.
Overseas investments work well if you have expenses in an international currency. Moreover, don't load up on this if you have just moved towards growth assets like equity. Only once you have built a sufficient surplus should you think about diversifying beyond domestic assets.
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