Beyond Dalal Street: Why Indian Investors Are Looking At Global Markets

For many years, the typical Indian investor's portfolio has primarily consisted of local stocks, mutual funds, time deposits and gold. Although these options remain crucial, the investment landscape is evolving. Advancements in technology and the emergence of new financial platforms have made it simpler for Indians to consider opportunities outside of domestic markets.

Options such as investing in global technology firms and accessing international Exchange Traded Funds (ETFs) are now more abundant than ever. The growth of GIFT City as a hub for international financial services is further enhancing this trend. However, does merely having access to global markets inherently make an investor's portfolio more diversified?

Not necessarily. In a recent podcast with Vivek Law, Mustafa Pardiwala, Chief Business Officer at Mirae Asset Capital Markets (IFSC), discussed how technology, global investing, and shifting investor behavior are transforming the financial landscape. Indian investors should look beyond domestic markets because India accounts for a mere sliver of the global equity market.

Therefore, restricting portfolios to domestic investments could mean missing out on opportunities within businesses and industries that hold a more prominent position abroad. Sectors like semiconductors, artificial intelligence, robotics, cybersecurity, and data centers are prime examples. Several leading companies in these areas are listed on international markets, particularly in the United States.

Participating in the growth of these businesses can be achieved through global investing, which also aids portfolio diversification across geographical locations, industries, and currencies. However, simply investing in a foreign company merely because it is popular or has previously shown strong returns is not a wise approach. Investors must evaluate the company's fundamentals, valuation, business model, and long-term potential, just as they would with a domestic investment.

GIFT City, located in Gujarat, is emerging as a significant center for international financial services. The International Financial Services Centre (IFSC) in GIFT City operates under the regulatory framework set by the International Financial Services Centres Authority (IFSCA). For eligible resident Indians, overseas investments can be made through permitted routes under the Reserve Bank of India's Liberalised Remittance Scheme (LRS).

This allows individuals to remit up to $250,000 in a financial year, subject to applicable conditions and regulations. Through this scheme and other permitted platforms, investors can access international stocks, ETFs, and other financial products. Another development is fractional investing, enabling investors to purchase a fraction of expensive companies instead of whole shares.

This can reduce the initial investment required to access certain global stocks. Nevertheless, a lower entry amount does not equate to lower risk. Investors must comprehend the product structure, transaction costs, currency conversion charges, taxation, and relevant regulatory requirements before investing. Currency risk is an essential aspect to grasp when engaging in global investing.

When an Indian investor acquires a dollar-denominated asset, the eventual return in rupees hinges on two factors: the performance of the investment and the movement of the rupee against the dollar. A depreciation in the value of the rupee can increase the rupee value of an overseas investment when it is converted back into Indian currency.

However, currency fluctuations can also work against investors. Even if an international investment performs well in its local currency, unfavorable exchange rate movements can diminish the final return in rupee terms. Therefore, investors should consider currency exposure when determining the proportion of their portfolio to allocate to international investments.

While investment opportunities have expanded, investor behavior remains a concern. Mustafa Pardiwala noted that the constant flow of financial information, social media commentary, and stock market tips can sway investment decisions. Today, investors possess access to more information than ever before, yet distinguishing valuable insights from market noise has become increasingly complex.

This can result in impulsive decisions, frequent portfolio adjustments, and an overemphasis on short-term returns. This issue is particularly prevalent in derivatives trading, where leverage and market volatility can amplify losses. Investors who enter these products without fully understanding their mechanics and risks may expose themselves to significant financial setbacks.

Similar to this lack of patience, frequent switching of long-term investments during market corrections or changing systematic investment plans (SIPs) based on short-term performance can disrupt the discipline necessary for wealth accumulation. The expansion of global investing offers Indian investors enhanced access to businesses, sectors, and markets that may be underrepresented in domestic portfolios.

However, global investing should not transform into another fleeting trend that investors pursue without comprehension. Before investing overseas, individuals should assess their financial objectives, investment horizon, risk tolerance, and current asset allocation. They should also familiarize themselves with the costs, tax implications, regulatory environment, and currency exposure associated with the investment.

While the future of investing may increasingly be global, the core principles of building wealth remain constant.