When anyone first starts investing, the most natural thing to do is to invest in channels available in the geographical confines of one’s home country. If you’re a resident of a country like India, you have access to countless investment vehicles, each designed to cater to the needs of investors with different financial goals and risk appetite. Apart from tax savings investments under section 80C, investors have options for growing their wealth like fixed deposits, mutual funds, and stocks.
A good financial portfolio would include a balanced mix of investments, with your funds allocated to a variety of instruments that help you achieve your various financial goals. Over time, an investor’s portfolio will grow to a point where more diversification isn’t possible in the domestic landscape. You may have reached a point where investing more money into domestic channels would not benefit you as it may have a few years ago. When you reach such a point in your financial journey, you can always consider investing outside your country of residence.
Both NRIs and resident Indians can invest in a number of investment instruments outside India. However, it’s not necessary for you to wait until you have run out of investment options in India. Making international investments benefits you in many ways, here are a few things that make an international portfolio better than a purely domestic one.
- Risk Reduction – By virtue of two different markets fluctuating almost independently of each other, you always stand a chance to make up for any loss you experience in either market. For example, if your returns from your domestic portfolio fall for any reason, you can make up for it by focusing on getting higher returns in the market that is more stable. If you had a purely domestic portfolio, you’d have to wait it out until the market stabilizes again.
- Market Cycles – When you have access to more than one market to make investments, you can take advantage of different market cycles to allocate your funds for better returns. This is how it works – If the markets in your country of residence feel overvalued or expensive, you can look at markets where they benefit from capital inflow and the demand for commodities.
- International Credit – As mentioned in our previous article, investing in an international market can open up doors to access more credit. If you have a significant investment in a particular country, you can take advantage of less expensive credit sources or credit sources that may be unavailable in your home country.
- Bigger Markets – Some international markets will be considerably bigger and are more mature than your home market, and offer better investment opportunities with lower risk. On the other hand, depending on the location, you could potentially find a market that is less competitive than your home market, again making it a better option to invest in the same stocks there instead of making a domestic investment.
There is one thing you should know before you start making foreign investments. There are two types of foreign investments you can make, one is a Foreign Portfolio Investment (FPI) and the other is a Foreign Direct Investment (FDI). The main difference between these two is that FPIs involve buying securities and other financial assets that are held passively with an investor, while FDIs involve buying controlling ownership of a business in another country.
FPIs tend to naturally be more liquid than FDIs. This makes them less risky and easier to sell, and they also have shorter time frames for getting returns in comparison to direct investments.
Are you looking to make a foreign investment or wondering what more you can do with your portfolio? Give us a call to speak to one of our certified financial planners who can help you with your queries.