Pratik Oswal on why overseas investing is imperative for Indian investors

Have a minimum of 15 to 20% (one or two) global funds in your portfolio for diversification, says Oswal

A globally diversified portfolio does more than manage risks better. Bindisha Sarang spoke to Pratik Oswal, Head - Passive Funds, Motilal Oswal Mutual Fund, to find out why overseas investing is imperative now for an Indian investor's portfolio, and, the best strategy to do so. 

Recently, after touching a record close, the S&P 500 has corrected sharply. How deep could this correction in the US market be in the near term? And what is the advice for Indian investors? 

The S&P 500 is one of the world's most popular United States' (US) index, where approximately 40% of the revenue of the underlying companies come from global sources, making it a global index. The current rally is happening because of the Federal Reserve's pumping of liquidity into the system, resulting in rates to be close to zero. As a result, a lot of this money has found its way in the stock market, propping up the stock prices. Also, earnings and recovery have been better than expected in the US market. Thirdly, vaccination trials are doing pretty well. Valuations now are on the expensive side with a lot of uncertainty too. New investors should not look at it from a rallying, rather a diversification point of view. Taking advantage of this, diversify your Indian exposure. An S&P 500 fund in your portfolio will decrease its volatility. Over the decades, Indian and US equity markets have seen a low correlation, making it ideal for diversification. The S&P 500 dividend yields are also a big bonus. To give an example – the index without dividends did 13x in the last 30 years but 27x if you include dividends. That's the magic of dividend compounding. 

I have learnt from the past that the future always manages to surprise everyone. I have also learnt that market timing does not work and that waiting for corrections destroys more wealth than investing through corrections. Risk-averse investors should look at diversifying slowly via SIP/STP. 

What factors should one watch before investing overseas?

Typically, there are two ways of investing in international funds. One is through mutual funds which offer two of the best indices NASDAQ 100 and S&P 500. Second, to send money abroad through the Liberalised Remittance Scheme (LRS) a slightly expensive but a good option. Most Indian investors today have zero per cent exposure to international funds. Investors should select funds as per their risk tolerance. Don't buy sector funds; go towards a very simple diverse mutual fund. History says that diverse mutual funds tend to be the most effective in terms of long term returns. Apart from that, use simple index funds. In mature markets such as Europe and the US, index funds have outperformed 90% of all the active funds. Lastly – investors should also look at emerging markets such as China, Taiwan, Brazil, as well as other developed markets such as EU and Japan. 

Passive investing in ETFs have lower fees over actively managed schemes. What are the other benefits?

In passive investing, fees play a very dominant role. Investors have realised the significance of low fees, especially for long term investing. Passive investing comes down to three things — simplicity, effectiveness and low costs. However, the most important thing is its timelessness. The S&P 500, was launched in the 1970s, today it is the world's largest index. It shows that not only has it survived for decades, but also created huge value for investors. 

The US elections are just around the corner. What do you think will be the economic importance of this year's US presidential election?

Over the last hundred years, an election, as well as a non-election year, has given a positive return of around an average of 7%. Despite events like world wars, great depression, markets always have seen an upward trend. Yes, there have been course corrections, but a long term investor has been pretty handsome returns. Investors can expect heightened volatility – but it may not be prudent to look at US elections when deciding whether or not to invest. 

The world is more than India or the US. NASDAQ has been highly volatile since May. Is it time for investors to have globally diversified exposure? How much is the right exposure?

Across the US, Europe, some parts of Asia investors have 20-40% allocation towards global equities. Global investing is now picking up in India too. Have a minimum of 15 to 20% (one or two) global funds in your portfolio for diversification. Having four to five domestic mutual funds isn't diversification as Indian mutual funds correlate 90% plus. S&P, NASDAQ indices have revenue streams from global operations such as Apple, Netflix, Microsoft. Having a US fund as your first overseas fund makes sense now. It is like buying a Global Fund. This could be followed by geographies, like Japan, Europe, China or Asia. Given the recent uptick in valuations – an SIP/STP strategy is advised. 

For someone who has already invested or long in the market since pre-Covid. Should they book profits or hold? 

Speculators rarely win. Investors need to have faith in compounding, the main driver of long term wealth. Anyone investing globally, should not do it for the rally or returns, but because it lowers the portfolio volatility now gives you downside protection.