There is a famous phrase used: ‘Don’t put all of your eggs in one basket.’ In current volatile market situations, investing in a single asset (equity, debt or commodities) or market (India, USA, UK, etc.) can significantly impact your portfolio.
Each market and asset class has advantages and disadvantages of its own. This guide will help you understand what global diversification is, what key benefits it offers for beginners, and how beginners can invest in global markets.
What is Global Diversification?
Global diversification is an investment strategy where investors diversify their portfolios across countries and regions to reduce risk and capture growth opportunities from across the world. This helps mitigate the impact of localised economic downturns or political instability.
For example, instead of putting all your money in the Indian stock market, you also invest in other markets like the USA, the European market, or the Japanese market.
To increase exposure and control risk, seasoned investors frequently diversify their ETF portfolios across international markets.
Why Should Beginners Consider Global Diversification?
Below are the key benefits which a globally diversified portfolio has:
- Risk Mitigation
Different national markets are driven by different economic cycles and political situations. A downturn in one region can be offset by strong performance in another region.
- Exposure to Global Growth
Diversifying the portfolio globally will help to capture the growth from different regions. Emerging markets offer higher returns during rapid industrialisation and economic growth.
- Access to Unique Opportunities
Some unique opportunities, like advanced tech, may be available outside your country. Global diversification allows you to invest in a broader range of instruments, like the Nasdaq ETFs, which might not be available in domestic markets.
- Currency Diversification
Holding assets in different foreign currencies can protect your investments against the depreciation of any single currency. If your country’s currency weakens, investments in stronger foreign currencies can help balance out potential losses.
Potential Risks of the Global Market
Understanding the risks behind an investment is one of the most important qualities an investor can have. Below are the key risks associated with the global market:
- Highly Volatile Markets – Some markets are highly volatile and react sharply to global events. Volatile markets create more opportunities, but they also have higher financial risk; investors must do the research before investing in such markets.
- Currency Risk – Exchange rates between the Indian rupee and foreign currencies like the U.S. dollar can rise or fall based on inflation, interest rates, and the economic stability of both regions. Although it will add an extra layer of risk, sometimes it also boosts the returns in terms of rupees if the rupee gets weaker. Â
- Taxes and regulations – Investment taxes, profit repatriation rules, and compliance requirements differ from one country to another. Policies from the Reserve Bank of India, like international remittance limits, can also affect how and when you invest overseas. It is important to keep an eye on government policies and political situations regularly.
In India, under the Liberalised Remittance Scheme (LRS), an individual can invest up to USD 250000 in one year.
- Platform/expense ratio – The cost of investing globally depends on the fund or platform you choose. Having awareness about such costs is important because it may not have an impact in the short term, but can make a huge difference in the long run. Investors must do the research and read the scheme information documents before investing.
How can an Indian investor invest in the global market?
Indian investors have various ways to invest in global markets. A popular way is through Indian mutual funds, which invest in international indices or in global companies. Many of these schemes are offered by established fund houses, which track global benchmarks or hold international stock baskets.
Many mobile investing platforms permit investments in a few nations with straightforward onboarding. Investors can invest by verifying their KYC through UPI or card payments.
One more low-cost option is to buy international exchange-traded funds (ETFs) that track most global markets, like the Nasdaq & Hang Seng ETF.
Beginners should start with a small portion of their investments, compare prices and currency regulations, and make long-term investments.
Conclusion
It can be a wise long-term investment strategy to diversify a portfolio across international markets. Diversification is beneficial for novices, but it must be done gradually and with research. Investors should educate themselves about the risks associated with investing in any foreign market.
