Diversifying an investor’s portfolio across multiple geographies can help them reap the benefits of investing in international shares, which has its own advantages. “The primary advantage of international funds is diversification. By investing in international markets, investors gain exposure to the global economy and access to unique investment opportunities,” says Santosh Joseph, CEO and Founder, Refolio and Germinate Investor Services LLP.
Apart from diversification, investors may benefit from currency fluctuations. Historically, the Indian rupee has weakened against the US dollar. “Over the past decade, the international exposure has helped investors generate an extra return on INR/USD, with a 3.3% CAGR each year,” informs Joseph.
Exposure to international equities can be an integral part of any portfolio, providing diversification and opportunity. Some of the global leaders and the primary engine of consumer-led growth are listed abroad in the US stock market.
However, as an international investor, one needs to be aware of the risks as well. Joseph lists three key risks that investors need to take note of – 1. Currency effect, where returns could be muted or wiped away due to currency fluctuations. 2. Geo-political risks, which can be difficult to predict or manage. 3. Economic risks such as interest rates, inflation, and the general economic status of international markets.
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The key challenges of these variables are that very little can be done to mitigate them, it is best to measure the exposure and stay within limits.
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Overexposure to a single economy or a few sectors and a handful of companies may prove to be unhealthy for the portfolio. To avoid concentration risk, one needs to be adequately diversified across the spectrum. One should exercise caution while building a foreign portfolio of global stocks, and ETFs and not chase only the winners. “When forming a strategy for international investing, it’s important to stick to your investment requirements and not chase returns or the excitement of investing overseas. Instead, focus on how international equities fit into your overall portfolio construct and invest accordingly,” cautions Joseph.