Global stocks are emerging as a new investment avenue for retail investors in India. The market capitalisation (market cap) of all the indices in the world is roughly $90 trillion, while India is at $3 trillion. The markets in the USA account for about half of the total global market cap.
Seven of the top 10 market cap companies in the world are headquartered in the USA, 2 in China and 1 in Saudi Arabia. The USA is the innovation hub of the world.
The famous FAANG stocks comprise the five most popular and best performing American technology companies: Facebook, Amazon, Apple, Netflix and Google which everybody wants to have a piece of.
If you’re only investing in Indian companies, and not branching out, you could be missing out on a big piece of the pie.
In terms of returns in the last one year, the Sensex features among the Top 15 performing major indexes globally. KOSPI tops the list with 46% returns, followed by Nasdaq at 43% and Sensex at 40%.
Table 1: Top 15 Global Markets in terms of 1 Year Return
In terms of year to date returns, Sensex is ranked 10th. S&P 500, Nasdaq 100 and CAC40 are amongst the top 3 best performing indexes globally this year.
Table 2: Top 15 Global Markets by Year to Date (YTD) Returns
Benefits of overseas investing
Investing in stock markets helps in diversification. Diversifying investments across asset classes, and within the asset class is key to managing risk. Like in equity one generally tends to invest across large, mid and small cap stocks, one can also have a basket of domestic and international stocks.
2. Broader exposure
Such investing helps you to participate in global businesses that do not have representation on Indian bourses. The general rule of thumb is that up to 10% of your assets should consist of international stocks.
3. High returns
As we see in tables below, India, an emerging economy, while among the Top 10 globally, does not generate the highest stock market returns. To get better returns one needs to invest in opportunities abroad. Needless to say, higher returns come with higher risk.
4. Currency depreciation
If you’re investing in countries where the currency is stronger (say $) than local currency, you have the potential to benefit from higher growth. Investing in global stocks helps you get the benefit of rupee depreciation. Over the last 30 years, the rupee has depreciated against the USD by an average of 5% per annum.
Where to invest
The USA , because of its sheer size and innovation, has to be in the portfolio. Other markets like China (Hong Kong) can also be tapped due to the high growth potential of their economy.
How to invest
You can invest directly in overseas stocks if you have the resources and time. Up to US $250,000 per person per annum can be remitted abroad under the Liberalised Remittance Scheme (LRS). However, there are compliance norms which need to be fulfilled.
It is mandatory to provide exhaustive details of foreign assets held by investors in Schedule FA of the income tax return form. This option is good for high net worth, sophisticated investors.
For small retail investors, the mutual fund (international fund of fund) route is a better option. These mutual funds either directly purchase stocks or invest in an existing global fund that already has a pre-designed portfolio consisting of stocks of foreign companies.
Some of the international stocks are very highly priced, like 1 share of Amazon is $3,656, just under Rs 3 lakh. Through this route, one can have a slice of Amazon stock, with low value SIPs.
Investment in these funds is treated as domestic investments and compliance rules do not apply. There is no limit on the amount you can invest, LRS does not apply.
It offers diversification across geographies, sectors and currencies.
International mutual funds were launched in India in 2007. A corpus of $500 million is available to each fund.
Types of international mutual funds
The international mutual funds are of various types:
Global funds (investing in large caps worldwide),
Regional funds (investing in companies in a specific geography)
Country funds (investing in companies in a single country)
Global sector funds (investing in companies around the globe in that particular sector)
Performance of these funds
Most fund houses now have schemes for international investing. The Top 8 as per is listed below. It includes all the categories of funds listed above - global, regional, country and global sector funds. 3 USA specific and 1 China specific fund Needless to say, past performance is not indicative of future.
To sum up, investment in overseas stocks presents a good opportunity to diversify our portfolio and earn higher returns.
Disclaimer: This is not an investment recommendation and readers are expected to do their own research or consult their investment advisor before making any investment decisions.