It is time Indians hedged against the home-country risk and put their money in more affordable markets overseas
When the world is speculating whether India will become the fastest growing economy in 2001 beating a slowing down China, it sounds heretical to tell Indians to invest abroad. But did anybody tell you that GDP growth and stock market performance are not really correlated? GDP numbers are about the recent past while investing is all about the future. Why else should a small number of seasoned investors build nest eggs outside mother India?
As the world’s financial and property markets got beaten up by the impact of the 2008 recession, India recovered quickly and its markets peaked to pre-crisis levels. This created a valuation differential between India and many other markets attracting a handful of HNIs to invest there.
The RBI had allowed a foreign investment limit of $200,000 per person each year. But for long, all this money went into real estate. Only recently have HNIs begun taking overseas equity seriously. Outward remittance in equity has grown about 44 percent this year, albeit on a tiny base. Those wanting to take a higher exposure often pool funds with family members, and have built sizable portfolios of as much as $1 million. “It is mostly the new money HNIs that have begun taking the initial steps through mutual funds and ETFs, and then moving on to other asset classes,’’ says Rajesh Saluja, CEO of ASK Wealth.
Why Go Global?
History has shown that no single stock market can be the world’s best performer for two years in a row. Like a musical chair, the hot destinations keep changing. “Stock market performance need not reflect GDP. That is a myth you and I live with,” says Arindam Ghosh, head of retail sales at J.P. Morgan Asset Management.
In fact, India has not been the best performer even once in the last decade. This clearly makes out a case for investing in multiple markets. The idea is to build a portfolio so it has uncorrelated elements in it, says Atul Singh, head of global wealth and investment management at BoA-Merrill Lynch. He says an investor must keep a large chunk of his money still in India, but hedge against the risk that India may falter by putting a small portion in other markets. The other strategy is to invest in asset classes not available or frequently traded in India. Foreign exchange and some base metals come in this category.
Investing in equities or commodities abroad is only slightly more cumbersome than investing in local stock exchanges. Indian brokerages have tied up with global partners and opened overseas offices to enable the purchase of stocks directly. This will enable you to build a customised portfolio, but could be a risky affair. Sitting thousands of miles away, an Indian investor will not be able to gauge the ups and downs of foreign markets and may not be nimble enough to get out of a tight situation.
That’s where the mutual funds come in. These funds pool in money from local investors and invest in stocks or other assets. Birla Sunlife International Equity Fund and Mirae Global Commodities Fund are examples of such funds. The risk here is that the local fund manager may not be the best person to take calls on foreign markets.
A growing number of feeder funds eliminate this risk. They invest their corpus into funds run abroad. In fact, most Indian fund houses have adopted this model. These funds typically get entry load exemption from the underlying fund so that the Indian investor pays a manager’s fee for only the Indian leg of the investment. JP Morgan JF Greater China Equity Offshore Fund is an example of this category.
A hedge against dodgy fund managers can be an Index fund. If it is a hybrid fund also investing in India, that is even better. One such fund allowing Indian investors to buy into China is the Hang Seng Benchmark Exchange Traded Fund. This ETF offers a tax-efficient way of investing overseas because the fund invests at least 65 percent of the assets into Indian equities and only the rest is allocated into foreign equities. This ensures there is zero tax on long-term capital gains.
What’s on the Horizon
(This story appears in the 14 January, 2011 issue of Forbes India. To visit our Archives, click here.)