Right Time For Global Diversification?

FACEBOOK, TWITTER, MICROSOFT AND AMAZON—the bigwigs of the tech world have been on a firing spree. Twitter has laid off 50% employees. Facebook has fired 11,000. Amazon and Microsoft are not far behind. All is not well with global big tech firms after phenomenal growth following Covid-19 outbreak, a performance that built massive euphoria around global investing, especially in technology stocks. Assets under management (AUM) of fund of funds investing overseas jumped a whopping 709% from '2,734.36 crore in March 2020 to '22,127.60 crore in January 2022.

The MF industry cannot invest more than $7 billion in global securities—a limit specified by Reserve Bank of India (RBI) to check drain on forex reserves. The respective fund house limit is $1 billion. With fund houses reaching industry ceiling, Sebi prohibited them from accepting fresh inflows from February 2. Did this mark the end of the road for global investing by Indians? Should you avoid global diversification at this stage, especially when majority of stock markets across the world, including the biggest ones in U.S., have been under pressure for several quarters and India has been a standout performer? A vehement no!

Most AMCs have started accepting fresh inflows. Moreover, global markets are trading at attractive valuations after falling sharply in 2022. Though the euphoria of the 2020-2021 period is missing, this is precisely the reason it may be a good time to go global.

How To Invest

With rupee depreciating sharply against the dollar, RBI is unlikely to revise global investment limits soon. However, a crash in global markets post Russia-Ukraine war and subsequent redemptions from international schemes made Sebi open the window for fresh inflows in June with a caveat that no fund house would breach its February 1 exposure. Most funds have started accepting fresh money now. Nishant Batra, chief goal planner at Holistic Prime Wealth, says, "Except for schemes from Mirae, all schemes from DSP, Edelweiss, PGIM and ICICI are open for subscription. Even Motilal Oswal AMC has started accepting funds. They are only accepting lumpsum up to '2 lakh per month. Systematic investments are restricted," he says.

Interestingly, there is a separate limit of $1 billion for exposure to global ETFs through fund of funds or ETF route. The fund house limit is $300 million. "Currently, a few fund of funds, which have ETFs domiciled outside India as underlying, are open for subscription. Examples are Kotak Nasdaq 100 FOF, Invesco India Nasdaq 100 ETF FOF and ABSL Nasdaq 100 ETF FOF," says Batra.

Alternatively, if you have a demat account, you may consider the ETF version of fund of funds. "While the fund of fund option is more convenient, it is more expensive than buying an ETF on a foreign exchange. When you buy a fund of fund, you are not only paying for the underlying ETF but also additional expenses the mutual fund incurs for running the scheme in India," says Vaibhav Porwal, co-founder, Dezerv.

Moreover, ETFs should reflect returns of their underlying indices, but illiquid nature of such ETFs in India makes them a risky proposition. "In ETFs, iNAV and traded price can be vastly different. A few months back, Motilal Nasdaq 100 ETF was trading at 10% premium to iNAV. This means investors will earn 10% less than the underlying index," says Batra.

Direct ETF

You can directly buy global ETF units through your demat account if your broking firm provides you a platform to take exposure to global markets. A number of Indian broking firms have a tie-up with start-ups such as Stockal, Globalise and Vested Finance through which you can invest in global stocks and ETFs directly after converting rupees into dollars. Such investments fall under RBI's liberalised remittance scheme (LRS) that allows individuals to remit up to $2,50,000 overseas in one year.

The process is tedious but tax and cost efficient. "One needs to approach one's bank, fill forms and take approval every time one has to invest. However, it will cost less even after factoring in currency conversion and remittance charges. Moreover, unlike domestic ETFs investing abroad where profits reflect mark-to-market gains as well as currency difference, in case of direct ETFs under LRS, the latter is not applicable in taxation," says Porwal. This means that for tax calculation, booked profits in case of domestic ETFs investing abroad will take into account two things—mark-to-market gains and currency movement. So, one will have to pay tax on currency gains as well. In case of direct investment through LRS, tax will be levied only on mark-to-market gains. 

Direct Stock Investing

You may also buy stocks abroad. The process is same as in case of ETFs, which means you have to go through your broker having a tie-up with a global investment platform. This investment will also fall under the LRS limit. "We don't suggest investing in individual stocks. Some of the finest fund managers are struggling to beat benchmarks. It is improbable that investors will be able to do that. Instead, we recommend passive strategies," says Porwal.

Managed Portfolios

Platforms such as Stockal, Globalise and Vested Finance offer investors a basket of stocks, called managed portfolios, curated as per different themes such as electric vehicles, next-gen tech, digital cash and SAAS. This is similar to what Smallcase offers for domestic stocks. One has to pay above transaction charges.

Take The Plunge

There are two reasons why global investing makes sense—currency and geographical diversification. Historically, rupee has been depreciating against the U.S. dollar by 2-3% per annum. It has fallen a whopping 11% this year. If you are planning to send your child abroad for foreign education this year, you will need more rupees than last year even if tuition fee remains the same. Global investing can protect you from such risk. "Whenever investors have a potential liability in a foreign currency, we start creating pools in that currency," says Porwal.

You also need geographical diversification. Data from Motilal Oswal Financial Services shows India contributed nearly 4% to world market cap as on October 2022. U.S. contribution was 43%. "India's contribution to world GDP is nearly 2% while U.S.' share is one-fourth. Also, some of the world's most innovative companies are not listed in India," says Batra.

In the current context, while Indian markets are up 1% (in dollar terms) so far this calendar year, markets such as U.S. and China have fallen 19% and 31%, respectively. "Valuations are sane for investing in US-based funds, especially tech-based ones. Chinese markets are trading at dirt-cheap valuations. There is a margin of safety in both the markets," says Niranjan Avasthi, senior VP & head, Product, Marketing & Digital at Edelweiss Asset Management.

The regulatory ban is not a hurdle to global diversification. Even as a few schemes are still open, inflows have remained range-bound. People smart enough to catch the trend are boarding the bus. Get ready lest you miss your chance.