In these challenging times of lockdown and quarantine, everything around us is at a literal standstill, including our stock market. It’s not a surprise that the Indian markets are currently witnessing massive volatility due to the Covid-19 pandemic. Many of us now wish they had diversified their portfolio, or are looking for efficient ways to diversify it now.
But what’s the best way to achieve this diversification? How can you protect your investments when an event like this impacts all the asset classes together? How can your portfolio be better prepared if the impact is asymmetrically higher for India?
It’s been over 15 years since Indian equity investors were first allowed to invest in foreign equities. You could have invested in Facebook, Amazon, Google, and other blockbuster equities when they were starting (through private investments) or when they went public. Considering the constant (more or less) decline in the Indian rupee, you could have made substantial returns on your investments. For example, in 2004, when the dust had settled on Google’s IPO, it was clear to many investors that “this would go BIG!”. The IPO price was around $85, but even if you’d have purchased it a little over at say $100, your investment would be worth over 25 times in present conditions (including the 2014 stock split). Also, back then, the $100 investment would have cost you around INR 4,600. Now each $100 will return you INR 7,570. Thus, by and large, that’s over 40x gain. Not bad!
It was not something that we could predict. A majority of Indian investors were either conservative or focused on domestic markets. The awareness about global investing and access to high-quality research was limited. There was also a lack of seamless investment channels. Opening a brokerage account and executing a trade in the US would have taken considerable effort, unlike today.
From 2003 to 2007, Indian markets opened up and went on an exceptional bull-run. This was one of the critical factors that made Indian investors partial towards the domestic market. And then there was the great recession of 2008, which further fanned the fire of misconceptions about investing overseas.
The resilience of US markets has, however, proven itself time and again. During the period immediately around the ’08 crisis (fall of 2007 -2014), the BSE Sensex provided total returns of 4%. In contrast, a rupee investment in the US equity market would have simply doubled the money.
The same resilience is being demonstrated once again during the current COVID-19 health crisis. Despite being one of the worst affected countries, US markets, and the US Dollar have performed better than the most. US markets have been offering a diversification that has been providing a higher return while having lower risk than Indian markets.
Investors should treat foreign investments as a type of diversification. The idea is to have different types of investments – in terms of company size, industry, investment type (stock MF, etc.), and geography. Diversification generally spreads out portfolio risk and absorbs brief market fluctuations. With global diversification, when the stock market in one part of the globe plummets, having some investments in the other part may be helpful.
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