Do you need investment in international equity to build wealth?
With several international equity funds in the market, the question that arises is, should you have some investment in international equity? While some international funds have matched the returns of the domestic markets, the category has not kept up with returns from large-cap mutual funds recently. Despite the lag in performance, should you invest in international equity?
Investment requires diversification
The major theme of a balanced portfolio is diversification. You should have a good and balanced asset allocation. No asset class should dominate your portfolio. Investing majorly in the Indian market, exposes us to the risks and happenings in India. A good way to mitigate this risk is to invest in international equity. In the month of April 2021, the Nifty lost around 2%. Nasdaq in the same period gained 4%. This would have ensured that your portfolio did not take a major hit. This is a good opportunity to tap into emerging trends across the globe and to also protect your portfolio from risks in one geographical area.
When a domestic investor wishes to invest in international equity, rupee is converted to that country’s currency and then invested in select assets. When one wishes to redeem the units, the reverse happens. In general, the rupee has lost value against major currencies such as the US Dollar, Euro and Pound. A person who has held on to this fund long enough, also gains the due to the currency movement, apart from the appreciation of the fund.
Some geographies have investment opportunities that are unique to it, for example oil in middle east. These opportunities would be closed off if one chooses not to opt for international diversification. Such opportunities generally offer a much higher rate of return and are usually insulated from price volatility. This would help balance ones portfolio and minimise risk while creating wealth at a faster pace.
Keeping in mind all the benefits, it is a very hard call to pass up on international investment opportunities, and must definitely be a part of your portfolio.