We all are aware of the benefits of diversification and all of us try and maximize the returns and reduce the risk by maintaining a good mix of stocks, mutual funds, gold, real estate, fixed income and getting it managed professionally.
Talking of global investments, one might argue or question whether it is really required. We are a developing economy, growing at a fast pace. And when there are so many areas to invest across diverse sectors in our country, why look at investing outside your own country just to diversify a bit more? After all, understanding the global markets, evaluating the investment options, the regulatory laws with respect to investments, keeping in mind the currency fluctuations and the tax laws-it is not easy.
The benefits of global diversification extend much beyond merely adding a few different products to your portfolio.
- Each economy is cyclical in nature, and periodically goes through periods of growth and recession. The timings of this business cycle differ from country to country. So, global diversification protects one’s portfolio from the impact of a downturn in the economy in his or her country.
- Now, coming to the equity markets, the general market direction remains the same; during a boom all the major stock indices are positive and during a secular downtrend most of them are down. But, the level of appreciation and fall differs – some economies fall less/recover quickly during turbulent times while some are more affected and vice-versa. Here too, diversifying helps even out this risk.
- Another important aspect is that there are certain attractive businesses/sectors which do not exist domestically. So, by not investing outside the country, one misses out on profiting from these.
- Tax incidence- The amount of tax you pay on the income earned on your investments has a huge impact on the overall portfolio profitability, especially in countries like ours which has a progressive taxation system- the more you earn, the more you pay. Hence it pays to invest in certain countries which have tax loopholes or minimal taxes.
Now the disclaimer! It is advisable to take the help of a professional who understands international investments and the rules and regulations and not attempt investing on your own.