Pros and cons of investing in Global Equity Via Mutual Funds

First, let’s look at why one should invest in global equities. We are living in an increasingly globalised world. As an Indian consumer, we have benefitted from access to a variety of high-quality goods and services that are produced outside India, be it mobile phones or luxury cars. Globally, there is a lot of innovation taking place that is impacting our day to day lives by disrupting various industries and will have investment implications. At this point of time, very few innovators are listed on the Indian stock markets. India may be the fifth-largest economy, but our market cap is about USD 2.1 trillion while market capitalisation of the rest of the world is USD 90 trillion. So if you are not invested in global markets outside India, you are ignoring an opportunity that is roughly 43 times bigger. Investing entails risk and risk cannot be eliminated but can be reduced by diversification. Diversifying investments across asset classes and also within the asset class is key to manage risk.

Investing in global funds/stocks also helps you get the benefit of foreign exchange fluctuations. Over the last 35 years, the rupee has depreciated by an average of 6%. So if you are planning for your daughters or sons education abroad a few years down the line, you will have to account for higher cost due to the rise in fees and foreign exchange fluctuations.

Global investing is relatively a new journey for the Indian investors. This journey is almost akin to the journey of an investor investing in equity MFs. We now have a segment of investors who have invested over the cycles and are comfortable with MF as a concept. They are moving beyond the regular conversation and are now engaging with their advisors on strategies to diversify beyond equity and debt predominantly to diversify, take advantage of currency as an asset class and participate in global businesses that do not have representation on the Indian bourses. As more people appreciate the fact that the source of market volatility can emanate from anywhere in the world and the only way forward is to diversify portfolios in as many asset classes as possible, international investing will gain traction.

Now, let us address the pros and cons of investing in global equities via Mutual Funds. Investors have two choices 1) investing directly into global equities 2) investing in mutual funds. Investing directly into global stocks has advantages like a) investor can run concentrate portfolio of select stocks (anywhere from single stock to about ten stocks) based on his understanding, comfort and acumen. He has complete control here and this may appear to be an easy option, but it is so only for a seasoned investor with reasonable resources and time. In addition to the capabilities to identify and monitor global events that would impact his stocks, an investor should also have the bandwidth to deal with compliance and regulatory issues. For example, it is mandatory to provide exhaustive details of foreign assets held by investors in Schedule FA of the income tax returns (ITR) form. Also, there is a limit of USD 250,000 per person per annum under the Liberalised Remittance Scheme (LRS).

Whereas investing in a mutual fund (international fund of funds or feeder funds) has many advantages like:

1. Treated as a domestic fund: investments into these funds are treated like investments into any other domestic fund, there are no additional regulations as the case with investing into stocks. At the same time, investors get currency exposure too.
2. LRS is not applicable.
3. Experts manage funds: Professional fund managers have the expertise, technology and global reach needed to identify, analyse and monitor stocks and portfolios.
4. Diversification: Mutual funds typically own many stocks (about 30 – 50 stocks in case of active funds) in different countries and across various industries, which offers diversification across geographies, sectors and currencies.

However, there are few disadvantages of investing via mutual funds, like lag of a day for applicable NAV, currency risks, long-term capital gains tax for less than three-year holding

To conclude, investing in global equities through mutual funds is a superior option for retail individuals than doing direct equities. Most advisors opt for diversified equity funds for first time investors in equity, here also going with strategies that are investing across the globe should be the logical first choice. Sophisticated high net worth investors with the resources and wherewithal to manage all the reporting and research, can supplement these rupee denominated global funds with direct stocks or other equity options available to them under the LRS route.

This article is authored by Srinivas Rao Ravuri, CIO-Equities, PGIM India Mutual Fund