It is common to spread your investments across equity, bonds and real estate. But diversifying investments across
geographies isn’t. In this article, we explore the relevance of global investments and when it would be appropriate to invest globally.

Global investments
You invest to achieve your life goals. Earning handsome returns on your investments is a means to achieving that goal. In a goal-based portfolio framework, each goal is considered a liability. For instance, if one of your life goals is to accumulate Rs. 1.5 crore in eight years to meet your daughter’s college education, your liability is Rs. 1.5 crore eight years hence. Matching the currency of your liability with that of your asset is an important part of goal-based investments. If all your liabilities are likely to be in domestic currency, you should have your entire investments in your home market.

Home market in this case refers to the financial markets in the country in which you currently live, and not necessarily the country of origin. For example, if you are an Indian by origin but you live in the US, your home market is the US.

But what if you have foreign liabilities? You may, for instance, plan to send your son or daughter to the US for college-level education.

This means your liability will be in US dollars. In such cases, it is appropriate to invest in dollar-denominated assets. In the second scenario, you could consider buying foreign assets if you would like to invest in exotic products that are otherwise unavailable in your home market. For instance, you may explore the US markets for buying alternative ETFs — those that offer market-neutral strategies or ETFs that bet on inflation and so on. .

You can invest directly in foreign assets or through mutual funds. Investing directly requires you to have a good
understanding of the foreign markets, including regulatory requirements.

If you are taking the mutual fund route, you can do it in two ways. One, you can set up an investment account through a bank in the country in which you want to invest.

Not diversification
And two, you can buy such funds through a feeder fund in your home country. Consult your tax or financial adviser regarding the procedure to make such investments.

Diversification is not the reason to invest in foreign assets. If your home market (read India) can generate a higher
return than the foreign markets, you do not have a compelling reason to invest abroad.

Besides, foreign markets also carry risks. So, investing abroad just to reduce market risk associated with Indian
markets may not be worthwhile. In any case, diversification does not help during extreme or abnormal market conditions.

This is because correlations among asset classes and between markets tend towards one when there is a global crisis.

Recall that all assets, including bonds and commodities, crashed in 2008 during the sub-prime crisis. Gold was an exception because it was considered a safe asset during the crisis.

Finally, remember this: you do not have to move out of your home market to buy commodities, as the local prices simply reflect international demand-supply trends adjusted for the exchange rate.

B Venkatesh
This article was published on August 2, 2015, in BusinessLine (The Hindu)