I have been a regular reader of The Hindu and BusinessLine for the last 20 years. I would like to invest in companies listed overseas, such as Microsoft, Tesla and Google, through the mutual fund route, via SIPs. I don’t prefer direct investments. A few months ago, I read an article in BusinessLine on where and how to invest overseas through mutual funds, but don’t seem to remember the nuances. Can you guide me on how to go about this?
Before you begin investing, do take stock of why you would like to own stocks listed overseas. There could be three reasons to do it. One, you may be interested in sectors or opportunities not represented in the Indian market, such as electric vehicle makers, biotech firms or electronics and semi-conductor makers. Two, you may like the diversification benefits of owning overseas stocks. Not all global markets move in tandem. During periods of very sharp corrections globally, India, like other emerging markets, tends to fall much more than developed markets such as the US. You may want the benefit of dollar diversification. The rupee has depreciated steadily against the dollar for the last two decades, with the bouts of depreciation worsening when there’s a global crisis. By owning dollar-denominated assets in your portfolio, you can actually gain from such depreciation. Owning dollar-denominated international investments can thus help smooth out your return journey, especially when stock markets in India appear overheated.
Three, you may have expenses in dollars or foreign exchange which you would like to hedge against. Investors who have children studying overseas or support relatives living abroad may like to own dollar-denominated assets in their portfolio so that they can offset it when rupee depreciation escalates those expenses.
If you’re set on investing in overseas stocks for one or more of the above reasons, taking the mutual fund route is a good idea. Investing in stocks, particularly in the post-Covid world, requires you to keep close track of sectors and companies you’re investing in. Finding such resources in one’s own country is hard enough, doing it in other countries can be an uphill task.
Taking the mutual fund route allows you to leave the task of stock selection to professional managers. Your overseas allocation needs to be well-diversified, just like your India exposures, with planned weights to individual stocks and sectors, which are rebalanced periodically. This is easier to do with mutual funds than with your own portfolio. Indian investors in international stocks need to be compliant with domestic tax laws and RBI’s FEMA and Liberalised Remittance Scheme rules, which is more easily achieved via mutual funds.
You can take the following approaches to implement this idea. One, set a fixed allocation of, say, 5 or 10 per cent for overseas funds in your portfolio. Stick to this allocation irrespective of market conditions, and book profits and rebalance if the allocation overshoots. Two, in choosing your overseas funds, focus more on dollar-denominated, US-centric stock funds than on other types. Though the Indian mutual fund industry offers a wide variety of products playing on overseas themes, thematic funds (such as those playing on tech stocks, commodities, agriculture or mining, for instance) require good timing of entry and exit and may not suit long-term investors, who take a more passive approach to their investments.
Similarly, funds playing on emerging markets or Asian markets may not offer sufficient diversification benefits for Indian investors because these markets, in a global crisis, behave like Indian markets. Funds investing in stocks are more desirable than those investing in assets such as bonds or real estate as the latter asset classes may offer better return potential in India itself. The US stock market offers a sufficiently wide basket of sectors and stocks, and geographically diversified companies, to supplement your portfolio, apart from giving you a dollar exposure. Choose funds with a diversified equity exposure. Three, use the SIP route to build your positions gradually over time, as all global equity markets are overheated at this point in time. Funds such as Franklin India Feeder US Opportunities, ICICI Pru US Bluechip and DSP US Flexible Equities meet these criteria.
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