Should you also invest in foreign markets?

When it comes to investing, we often hear about diversification. To reduce portfolio risk, investors must invest in equity, debt, gold, and real estate. Investors can take a step further and take diversification to the next level - explore investing in foreign markets. Having said this, it does not mean that everyone should go ahead and start investing in foreign markets. Like any other investment, you should first understand the pros and cons of investing in foreign markets and then take a call.

Types of international markets

International markets are divided into two categories:

Developed markets: Include countries with secure economies, established industries, widespread infrastructure, and a relatively high living standard. It includes countries like the USA, United Kingdom, Canada, Japan, Australia, and France.
Emerging markets: Include countries that have less-stable economies and developing capital markets. However, they are considered to be in the process of transitioning into developed markets and may be experiencing rapid growth. Emerging markets include South Africa, Mexico, Egypt, and Russia.

How can you invest in foreign markets?

The most vital question investors have is how they can invest in foreign markets. There are three different routes you can take to invest in a foreign market:

Direct stock buying: You can buy stocks of companies listed in the US through different platforms that allow you to purchase US stocks on their platform.
Mutual funds: Asset Management Companies (AMCs) have mutual funds that focus on foreign markets. With mutual funds, you can easily invest in countries like the US and China.
Index route: If you want to invest in a particular index from a foreign country that is available in India, you can do so through Exchange Traded Funds (ETFs). Nasdaq is one of the most popular indices in India.

What are the benefits of investing in foreign markets?

Now that you know how to invest in a foreign market, you must also understand the benefits of doing so. It will help you make better decisions. Below are the benefits:

Diversification: As mentioned above, one of the biggest reasons to invest in a foreign market is diversification. It allows you to diversify your investment portfolio beyond the Indian market. It can help reduce risks by spreading your investments across different countries, industries, and currencies.
Access to new opportunities: Foreign markets may offer access to industries, companies, and sectors that are unavailable in the Indian market. By investing internationally, you can capitalize on emerging trends and potentially benefit from higher growth rates in other economies. For example, in India, we don't have any super-tech companies, whereas, in the US, we have a bunch of such companies.
Hedging against domestic risks: Investing in foreign markets can act as a hedge against domestic economic, political, or regulatory risks. If the Indian market experiences a downturn, your international investments may perform better and offset potential losses.
Currency diversification: When investing in foreign markets, you are exposed to different currencies. If the value of the Indian rupee depreciates against other currencies, your investments in foreign markets can provide a natural hedge and preserve your purchasing power.

What could be the potential downside to investing in a foreign market?

Every investment option comes with a set of risks. Investors must understand the risk before investing their hard-earned money in the asset. So let us look at the risks associated with the foreign market:

Currency risk: Currency diversification can be an advantage, but it also introduces currency risk. Fluctuations in exchange rates can impact the value of your investments when converted back into Indian rupees. Currency volatility can lead to gains or losses, depending on the exchange rate's movements.
Lack of familiarity and information: Investing in foreign markets requires understanding the local market dynamics, cultural factors, and economic conditions of the country. Accessing reliable information and conducting thorough research may be more challenging for international investments. If you are new to investing, investing via mutual funds or ETFs should be a preferred choice, over directly investing in foreign stocks.
Higher costs and complexity: Investing in foreign markets may involve additional costs, such as foreign exchange fees, brokerage fees, taxes, and compliance expenses. Managing investments across different countries can also increase complexity and administrative burden.
Liquidity and accessibility: Some foreign markets may have lower liquidity compared to the Indian market, especially in certain emerging or frontier markets. It can make it harder to buy or sell investments at desired prices, potentially affecting the ease of portfolio management.

How much should you invest in the international market?

It is a tricky part. The opportunity to invest in companies like Amazon, Meta, Google, etc can be fascinating. However, be careful before investing in them. The first thing an investor needs to do is have a proper portfolio of Indian stocks - a diversified portfolio of small, mid, and large-cap companies spread across industries. Once done, you can move to the international market.

You can start small and build the international portfolio over time - a SIP route might be better. How much allocation to have in foreign market stocks? There is standard percent number which can be given to answer this. Determining the appropriate level of exposure to foreign markets depends on several factors, such as your investment goals, risk tolerance, time horizon, and diversification strategy.

However, to give you a number, you should not have more than 20% exposure to foreign markets. If you plan to have a higher allocation, you should consult a financial advisor and discuss the same.

Conclusion

It is essential for every investor to thoroughly assess the risks and rewards associated with investing in foreign markets and consider their risk tolerance, investment goals, and time horizon. You should invest in foreign markets with a clear road map so that it helps you achieve your financial goals.