- International investing refers to holding securities issued by companies or governments in countries other than your own.
- By investing globally, portfolios can become more diversified which can enhance returns and reduce portfolio risk.
- Owning foreign assets also exposes investors to unique risks such as those that stem from changes in exchange rates, foreign interest rates, and geopolitical events.
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Benefits of Global Investment
Diversification is the most obvious yet the most crucial benefit of global investing. A diversified portfolio acts as a source of stability during market volatility. When you spread out your investments across geographies, there is a low correlation between them. This means that the volatility in one market is likely not to affect your other assets.
Many of the US-listed companies have global revenues. Over 40% of the revenues of the S&P 500 companies comes from outside the US. By investing in the US itself, you can build a globally diversified portfolio.
Wide range of investment options
Global investing enables you to access investment opportunities that are not present domestically. Developed markets like the US are home to some of the world’s largest tech companies – something you cannot access by investing in India.
You may even choose a theme or a combination of multiple sectors. For example, you can prefer the US market for technology, Europe for engineering, and Australia for commodities. If you are interested in healthcare or pharmaceuticals, there are several options in the US and Europe.
You can access multiple geographies through ETFs. For example, you can invest in German equities through the US-listed EWG ETF or in the Brazilian market through the EWZ ETF.
Another significant benefit of global investing is the protection of investments against fraud and liquidations. Developed market companies generally have strong regulations that ensure sound corporate governance and severe penalties for market abuse. This protects retail investors from potential scams and insider trading losses.
Investing overseas exposes you to currency appreciation (or depreciation). For example, the USD has been appreciating, on average, between 3-5 percent versus the INR over the last few years. Emerging markets’ currencies depreciate over the longer-term. Interest rates in domestic savings accounts are at a low 3-4 percent on average.
By investing globally, portfolios have generally had the dual benefit of better markets and appreciating currencies.
Risks of Global Investing
The benefits of international investing are evident. However, one must also consider the risks that come with it. There are three risks that you should be aware of while investing globally.
Higher Transaction Costs
The most significant barrier to investing in global markets is the added transaction cost, which varies depending on the foreign market you want to invest in. For the US markets, Winvesta offers zero-commission brokerage, which is cheaper than even domestic investing. For many other markets, access may not be as inexpensive.
There may be additional costs like FX conversion charges, transfer fees, and annual maintenance fees that you should know on top of the brokerage commissions
When investing directly in foreign markets, you first have to convert your Indian rupees into a foreign currency at the current exchange rate. Let’s assume you own a foreign stock for a year and then sell it. You then convert the foreign currency back into the Indian rupee. That could help or hurt your return, depending on which way the domestic currency is moving.
While investing, you should also consider the geopolitical environment of the country. Political events affect the domestic markets of the country and may lead to volatility. In developing markets, government and policy decisions could hurt even the most prominent companies. We have seen this frequently in countries like Brazil and Argentina.
Asset allocation stabilities your risk and reward by allocating your assets
One place to hold your investments
Financial instrument that holds some type of monetary value
Getting the shares of a private corporation to the public in a new stock issuance
Global Investment Importance
The risk to your life makes your family vulnerable. Being an earning member, any unforeseen incident can disrupt the financial stability of your family. A term insurance plan ensures that your family does not have to compromise with their lifestyle in your absence. The payout from a term plan can be used to meet the monthly expenses of the household. The sum assured can also be utilized to fulfil the crucial life goals of your children like schooling and higher education.
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