Portfolio diversification is a strategy whereby an investor invests in a variety of assets that have different features. The strategy is used to minimize risk and maximize returns. On an average, investment portfolios composed of different kinds of investments yield higher returns and pose a lower risk compared to any individual investment within the portfolio. We can extend diversification to investments outside of India as well.

WHY

Opportunity for better returns

The S&P 500, a good measure of the US stock market has grown by 32.51% in the last one year. The 5-year annualized return is 15.22%. The Chinese stock markets represented by Shanghai Composite Index were up by 13.87% in 2020. Other countries like Slovakia, South Korea are growing economies.

There is a great opportunity to capitalize on the long-term growth potential outside of India and therefore, you should consider including foreign investments in your portfolio.

 Currency Advantage

If you invest in countries where the currency is stronger (for e.g., USD), you can gain higher returns in terms of the differential to the extent the other currency has risen. But you have to factor for expenses incurred in foreign exchange currency transactions, so this advantage will be tangible only in long-term returns.

HOW

Retail investors can get international exposure in their portfolio in different ways. They can invest in:

• Indian Mutual Funds

They can invest in Indian mutual funds that have that have exposure to foreign equity. Factors such as geography, sector and category of funds have to be considered. Here are some of the schemes and a glimpse of their returns:

• Real estate in foreign countries

Buying real estate abroad is another way to diversify your portfolio. It can be advantageous for NRIs or residents planning to stay abroad or set up business abroad. They can buy property in their country of residence or business. Apart from the potential returns, it can provide other advantages like citizenship, special visas, social benefits and fulfillment of aspiration of living abroad.

Of course, the typical challenges of real estate investment still remain. It is not easy to manage from a distance. The investments are governed by the condition that Indians can remit a sum of US$250,000 per financial year abroad.

• Direct Equity and Mutual Funds in foreign countries

It is possible to buy shares of foreign companies or invest in foreign mutual fund schemes including Exchange Traded Funds (ETFs) through financial institutions. You have to be aware of the rules and the transaction costs.

Indians can remit a sum of US$250,000 per financial year abroad and investments cannot exceed this limit.

 HOW MUCH TO INVEST

There is no one answer to this. Based on your current investment portfolio, risk tolerance and financial status, you have to decide the extent of investments abroad. Typically, 5%-15% of your portfolio can constitute of international investments.

 TAX IMPLICATIONS

Capital gains on foreign investment are treated as fixed income for income tax purposes. Gains on investments redeemed within three years are considered as short-term capital gains. They will be taxed as per your existing tax slab. Other gains are considered as long-term gains. They are taxed at 20%, subject to inflation indexation benefits.

Investing in international assets have the similar risks and opportunities as local investments. A proper allocation strategy and investments after relevant due diligence or on the advice of your financial planner has the potential to give you handsome returns.