NRIs often ask investment advisors this pertinent question,
Where should I invest my savings?
- My home country, an emerging market with excellent future prospects, or
- Global opportunities for a share in the pie of established organizations with superior competitive advantages
There is no straightforward answer to this question; in fact, one can answer this question only by raising numerous other questions; the most vital one being, what are your long-term financial goals?
NRIs lead an international lifestyle and (in most cases) are dollar dependent for expenses like children’s education, medical treatment, and travel. Therefore, a robust post-retirement plan will better position them to decide their global or home-country savings allocation. For example, let’s consider Amit plans for a post-retirement life in India. This would require him to invest in a Rupee denominated long-term investment for post-retirement. However, for other expenses, short-term goals like children’s education, travel, and medical expenses will require investments in his work-country’s (preferably dollar) denomination.
Ideally, for an NRI with a substantial investible surplus, the right strategy is to invest not merely in domestic economies but also across major economies. This spread gives your portfolio superior diversification while simultaneously offering compelling avenues to invest and gain.
Why invest in India? India is a growing economy; the financial markets have proven their resilience even in these testing times of volatility and lockdowns. With funds outperforming benchmarks and the markets hitting record highs, investors have made gains and booked profits while remaining invested, even during volatility, knowing there is more potential for growth.
Yes, volatility exists, and funds have underperformed global peers due to spikes during the second wave; mere market corrections are expected year on year, which should not deter investors from staying invested. Over the past few years, large caps led market growth, while today, mid-caps and small-caps are taking over the lead. Attractive valuation and post-Covid tailwinds are opening several opportunities in sectors like pharma, digitization, and e-commerce dominated by mid-caps. During intermittent periods of volatility, picking up quality growth stocks in small-caps at very attractive valuations and including these mid-cap categories of funds in one’s portfolio at this current stage could prove beneficial in the long run.
As India continues on its growth trajectory, the combination of Indian Inc. being significantly deleveraged (yet strong on balance sheets) and the Government’s aim and estimates of the vaccination drive to cover approximately 40% of the population by Sep 2021, these are signs of a robust comeback to normalcy shortly. With RBIs continued support to maintain liquidity in the markets and the Government’s continued expansionary approach, demand will soon rise, and business will likely be back as usual.
Over the last decade, Indian markets and U.S. markets have offered similar returns to their investors. The DJI has generated a compounded annual return of 9.75%, whereas the Sensex has generated a return of 9.70% in the last ten years. Every market globally has a unique opportunity to offer; for instance, the U.S. is a technology hub with a $20.8 Trillion GDP and $45.8 Trillion market cap, while China is a manufacturing hub with $14.8 Trillion GDP and a $11.7 Trillion market cap. Capitalizing on opportunities by investing in future-ready businesses in these countries can benefit investors in the long run.
Suppose Amit allocates 10% of his investible surplus in global markets, wherein 7% of this weightage is in developed markets like the U.S. and 3% in emerging Asia-Pacific. In that case, he is more likely to earn better gains while keeping his portfolio balanced even through volatility.
From a wealth creation point of view, safety comes first while investing, which is why diversification in non-correlated assets across geographies is the key to maintaining a healthy and balanced portfolio that offers risk-adjusted returns. Unfortunately, most NRIs invest solely in Indian assets due to home bias. This tunnel vision leaves their portfolio open to economic risks like political instability, currency rate risks, government policy shifts, and more. Some NRIs may choose to invest solely in the location of their current stay or work, which could be due to familiarity bias. Either way, the risks involved while investing considerable sums in a single market are akin to all your eggs in a single geographical basket.
Benefits of global investing:
- Super diversification across non-correlated asset classes
- Access to unique market opportunities
- Hedge against economic and currency depreciation risks
As investors, it is essential to remember that neither a single asset class nor a specific market can consistently outperform. In addition, the financial markets are cyclical; hence, diversification ensures that your portfolio remains stable through all the ups and downs during these cycles.