Invest without a home country bias

Rather than trying to invest in a few stocks, currencies or markets based on partial and selective wisdom attained through sensational news clippings or business channels one should look at building a solid diversified portfolio of funds.

Sensex has delivered annual gains of less than five per cent over the last five years. This makes the hunt for new investment avenues quite natural. Over the last couple of years disenchanted Indian HNI equity investors have been moving away from equities to other asset classes such as commodities, real estate, debentures, direct Private Equity investments and so on. A plethora of of tax-free bonds issues such as NHAI and RECs last year further explains this phenomenon.

The quest for better returns have made Indian HNI investors evaluate offshore investment options to add alpha to their portfolios.

Empirical evidence suggests a strong home country bias in all investor portfolios, thereby restricting not only the objective of diversification but it also makes investors miss good opportunities outside the home country.

Prior to 2004, before Liberalised Remittances Scheme (LRS) was launched by RBI, capital controls were the first stumbling block for Indian investors to venture outside India.

Multiple avenues

Now there are multiple ways in which global exposure could be added to portfolio. One of them would be to use the $2,00,000 LRS mechanism to open an offshore investment account and build a portfolio for global Funds, stocks or ETFs.

The other easier and simpler way will be to take advantage of many feeder funds launched by Indian MF companies which use investments made in India in rupee to invest/feeds into a global fund.

The rationale of adding global investments in portfolio are plenty. Currency and geographical diversification giving opportunity to invest in economies and companies that do not have risk-reward characteristics like India is one of them.

The other significant advantage is the ability to invest in sectors/ themes which are generally not available in Indian markets. Agriculture, Oil, Internet/E-commerce, Water, etc, are some areas which have good potential, but do not offer investment vehicles in Indian markets due to sector-level regulatory restriction or lack of developed market for those themes.

Since it is impossible to predict which stock/fund/manager will do best in next one to three years, investors divide their investment between 4-5 good managers/funds. The same logic can be extended to r stock market for promoting geographical diversification.

Abysmal performance

Given its robust growth and favourable demographics, no analyst could have predicted India's abysmal performance in 2011, both for stocks as well as currency. On the other hand, US markets grappled with slowing demand and credit squeeze.

But in 2011 when US markets delivered positive five per cent returns, India was down by more than 24 per cent. Add another 15 per cent or so for INR weakness and the strength of argument multiplies many folds.

Build solid portfolio

While there are many obvious merits of offshore investments, we should also acknowledge and be aware of the fact that the global investment world is lot more diverse and complex. Hence, maintaining a disciplined investment approach is the key to success. Rather than trying to invest in a few stocks, currencies or markets based on partial and selective wisdom attained through sensational news clippings or business channels one should look at building a solid diversified portfolio of funds.

Another factor to avoid should be to steer away from fads and media hype. Current hype about Facebook IPO is the case in point. While I have no doubts of the power of social networking and the impact Facebook has made to millions of people's everyday life, I am not adequately experienced to evaluate the business model, financials and future prospects for the company.

Hence, rather than taking a direct hit by buying share in IPO, I would rather invest in a US market or a technology fund and leave it on the judgment of fund manager on whether to invest and how much. We have seen many examples in the past where investors have rushed in for the trade based on media frenzy and were later left holding the hat when the music stopped. Silver trades in recent past are a good reminder of the same.

Preserving and growing wealth is not as difficult as creating or building it. An easy way to achieve this objective is to keep investment disciplined, simple and away from any exuberance. A share of global investments to the tune of anywhere between 10-15 per cent of portfolio is a sound strategy. In the current world of uncertainties and surprises, this is an investment principle which can benefit all investors.

(The author is Director, Wealth Advisory and Family Office Solutions, ASK Wealth Advisors Pvt Ltd. The views are personal.)

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