Investing Beyond Borders

For a long time, investing in global giants like Apple, Google, Tesla, or Ferrari felt like something only ultra-rich or institutional investors could do. However, sending your capital across borders has never been easier. To help everyday investors navigate this exciting space, CFA Society India conducted a session on Investing Beyond Borders. They brought together industry experts Mihir Shirgaonkar, CFA, from Philip Venture IFSC, Pramod Gubbi, CFA, from Marcellus Investment Managers, and Viram Shah, founder and CEO of Vested Finance, to simplify the strategic case for global investing.

Here is a breakdown of their best insights from the event.

Why Our Home Country Isn’t Enough?

As Indian investors, we love our home market. However, choosing to invest only in what we know is called “home country bias”. While India is an incredible long-term growth story, it currently accounts for just 1.9% of global stock market capitalization. As all three speakers quoted, “If you restrict your portfolio to only Indian stocks, you are actively choosing to miss out on 98% of the world’s investment opportunities”.

By not stepping outside India, we miss out on massive themes that don’t exist in our domestic market, such as advanced artificial intelligence, cutting-edge semiconductors, aerospace monopolies, and heritage luxury brands like Hermes, Louis Vuitton, or Ferrari.

Furthermore, a fast-growing economy does not automatically mean great stock market returns. As Mr. Pramod said, China has seen massive GDP growth over the last 30 years, yet its stock market has historically delivered very poor returns. Conversely, the US has seen much lower GDP growth but has delivered world-leading stock returns. Finally, the Indian Rupee has historically depreciated against the US Dollar by about 3% a year. Earning returns in US Dollars acts as a crucial shield to protect your global purchasing power over time.

Unspoken Risks Behind “Mutual Fund Sahi Hai”

While many celebrate the massive boom in domestic mutual fund SIPs, Pramod warned of a hidden macroeconomic risk driven by unquestioned domestic inflows. He pointed out a “principal-agent problem” among asset management company (AMC) CEOs and CIOs, whose main job is to generate more assets.

These relentless domestic flows have made Indian equities “super expensive”. Because valuations are so stretched, it is actually causing capital to leave the country in other ways: foreign investors have continually sold out of India over the last five years, and Indian promoters who IPO their companies are taking their massive profits and investing them globally rather than putting them back into the expensive Indian stock market. Ultimately, Pramod argued that “ironically the best thing for India from a macroeconomic perspective would be a sharp correction in Indian equity markets”, which could be triggered by reducing the taxation on debt mutual funds and increasing the limits on domestic mutual funds investing globally.

“Free Lunch” of Diversification

In economics, they say there is no such thing as a free lunch, but in investing, diversification is the only free lunch. For retail investors, this means combining investments that don’t move up and down at the exact same time.

Historically, the US and Indian stock markets have a very low correlation, meaning they behave differently during different crises. Adding global stocks to our Indian portfolio smooths out the bumpy ride. The biggest advantage of this is behavioural: it helps you sleep peacefully at night, so you don’t panic and sell your investments at the bottom of a market crash.

To prove this, Pramod shared a fascinating study: If you had put 50% of your money in the US S&P 500 and 50% in the Indian Nifty 50 over the last 20 years, and just rebalanced it once a year, your combined portfolio would have delivered higher returns with lower risk than if you had just held either index alone.

Traps Investors Should Avoid When They Go Global

It is easy to make mistakes. Here is what the experts warn against:

• Illusion of Diversification: Buying a “global” index fund might feel safe, but the US makes up over 60% of global benchmarks. Even worse, a tiny group of top US tech companies heavily dominates these indexes, with the top seven names taking up over 30% of the S&P 500. You might think you are globally diversified, but you are actually just heavily concentrated in a few American tech giants
• Chasing Fads: Avoid getting swept up in sudden trends like the pandemic video gaming boom, or massive hype in silver and cryptocurrencies. Focus on structural, long-term trends like the data centre and semiconductor ecosystem rather than fashionable stories that eventually crash.
• Over-complicating: With thousands of ETFs available, investors often buy too many without a core strategy. Mr.Mihir warned of this exact behaviour: “One fine day they may sit on a portfolio comprising 70 to 80 different ETFs, and then they know that their portfolio is probably exceptionally diversified, but their returns are not getting made at all”

Giving in to Panic: Mihir emphasized that enduring market drawdowns requires immense patience. “If the fundamentals are sound, if the valuations are reasonable, and if your conviction is very high, holding on to it and navigating those unfortunate ups and downs can be a better strategy. Regulating emotions becomes most important,” he advised

How to Actually Invest Globally (The Practical Steps)?

Investing abroad has become remarkably simple thanks to modern platforms. However, Viram Shah was quick to reassure investors that going global doesn’t mean abandoning your domestic roots. “This is not going to be your core. India will continue to be your core. Nobody is denying that,” he explained. “But you may want an allocation of 20%, 30%, 40%, depending on your scenario, to the international markets”. Today, under the RBI’s Liberalised Remittance Scheme (LRS), you can send up to $250,000 per person abroad every year. However, retail investors must keep a few operational rules in mind:

• Tax Collected at Source (TCS): Any amount you send abroad over ₹10 lakhs will attract a 20% advance tax. Don’t worry, you can claim this back when you file your income tax returns or adjust it against your advance tax.
• US Estate Tax: While the US doesn’t charge you capital gains tax (you pay that in India), if your direct US portfolio crosses $60,000, your investments could be subject to a massive US estate tax in the unfortunate event of your demise.

Rise of GIFT City

To remove these hurdles, GIFT City is rapidly emerging as the de facto regulated infrastructure for Indian residents (the safest and best route for Indian residents). Located in Gujarat, GIFT City operates in US Dollars but is governed by Indian regulators. It offers retail investors a familiar, secure ecosystem to access global mutual funds and direct stocks without many of the cross-border headaches.

Conclusion:

Investing globally is not unpatriotic or overly risky; it is a basic requirement for protecting your family’s future wealth. By managing your risks, staying patient during volatile times, and using simple platforms or GIFT City, everyday retail investors can now effortlessly own a piece of the world’s greatest companies.