Featured in Economic Times on 06/07/2020
“I want to invest in foreign markets. What do you think?”
That was Ravi, son of one of our very old clients. “With markets around the world in so much turmoil, it looks like a good opportunity to get into foreign markets,” he elaborated his theory.
I knew that investing in foreign markets, especially the USA, has become extremely popular lately.
“Ravi, if it was suitable for you, we would have told you while planning your portfolio. Right now, you do not have any children, and no dependents. For someone like you, it makes sense to first build a solid, diversified portfolio in India, and then explore options abroad,” I explained the situation to him.
Ravi did not get the point. “I have no dependents and I can take risks. Don’t you think that is why I should diversify into other markets outside India,” he asked me.
“Definitely! You can take some risk. First, build a good portfolio in equity in India, and then diversify. Risk is good, but it has to be to be calculated.”
Ravi further asked, “With the ongoing India-China dispute, does it not make sense to invest outside India? Diversifying in multiple economies would be useful here, right?”
I explained the logic further: It makes sense to invest abroad for geographical diversification. If you wish to travel there, or planning to send your children for studies abroad, or open a company there… investing there would help to mitigate the risk of currency fluctuations, too. “Do you plan to do any of these things right now,” I asked him.
I also asked him whether he is capable of tracking possible economic or political upheavals in another country. Problems can arise anywhere, and you may not have the time to track the markets in different countries.
The point is: Diversification is good, but one should ensure complete diversification with the right asset allocation in India first. For example, if I am in the business of financial planning, I cannot be selling mobile phones to minimise my risk if there is a crash in the financial markets. People confuse diversification to limit risk, but that is gambling rather than diversification. The same applies to investment.
Ravi seemed a little disheartened. Are you telling me I shouldn’t invest in international funds, he asked me.
“If the idea is to just try, you can invest in the international market via mutual funds that have a foreign market allocation, or choose ETFs traded on foreign exchanges of your choice, as a safer option. At the end of the day, whether it is India or anywhere else, Mutual Funds Sahi Hai! But focus first on your asset allocation and financial planning first of all.”
I recommended some Indian mutual funds and ETFs with exposure to the American market and explained the risk involved in them to Ravi.
I told him the natural option might have been to consider stocks, but I recommend it only to investors with time, money, and expertise to handle stock market investing.
Ravi was finally convinced. “I think I should focus on my asset allocation and financial planning. Till the right time comes, it is better to watch movies on Netflix or order goods on Amazon, rather than planning to invest in them!”