Let’s understand why global diversification will add value and reduce risk in your portfolio
India contributes 3.3% to the global Gross Domestic Product, or GDP. U.S. and China contribute 22% and 15% to the global GDP. Which gives them more stability and economic power. A diversified financial portfolio gives investors options in terms of economic fluctuations and, by investing internationally, your finances will have alternative sources of stability. In other words, if your money is spread out among various countries, then an economic crash in one country won’t affect other investments though in todays linked markets it may impact the other.
Today lot of parents want to send their children abroad for studying, over the years the Indian currency has reduced in value against US Dollar or UK Pound thus increasing the fund requirements for such goals. By investing in those countries, it becomes a natural hedge for such liabilities. This will also give stability to your returns and diversify the risk of currency. This depreciation will also help boost returns over time.
We all have our own specialization and areas we excel in, similarly countries have their strengths, The U.S. economy is driven by consumption and technology sector. China is the world’s manufacturing hub whereas Germany and Japan are known for engineering excellence. Each one of them having their own unique place in global Economy. Investing in these countries can give your portfolio diversification and strength.
Over the years there is no one market that has outperformed the other consistently due to its political and economic cycles. Further, it is difficult to predict which market or asset class will perform well each year. There have been markets that have performed well during those periods when Indian markets fell. It pays to be diversified across different markets to cash in on such opportunities. It goes without saying that global investing comes with it share of Risks. Currency risk – Exchange rate fluctuations affect size and volatility of return. As discussed above for India this is not a big risk over a period of time as we have a depreciating currency against other economies
It is always difficult to have information about companies or economic condition in another country than in home country. It also makes the investment portfolio complex.
There can be political instability and lack of fiscal/monetary policies, discriminatory practices such as taxes on foreign investors, or simply instability which can impact the investments and returns of an investor
It’s always better to go with an informed decision than one that relies merely on chance, a learned understanding of various global economies and markets based on our years of expertize, can help you diversify your investments, reduce the risk which is always better than the “eggs in one basket†approach.
