During the 1970s, when the oil prices rose upto ten times throughout the decade, the Japanese stock market trebled. On the other hand, the US stock market at that point in time was nowhere to be seen. This was fueled by Japan’s rising productivity as well as technological advancement.
The essence of the matter is that at any given time, at least one economy is performing well, and it pays well to be able to diversify your holdings across global markets.
Everything is literally at a standstill around us during these challenging circumstances of lockdown and isolation, even our financial market. It is hardly surprising that the Covid-19 pandemic has caused extreme volatility in the Indian markets right now. Many of us today look for effective strategies to diversify our portfolios or wish we had done so earlier.
But how might this diversity be accomplished most effectively? How can your money be safeguarded when a situation like this affects all asset classes at once? One option you can consider is investing in foreign stocks.
Reasons to consider investing in foreign stocks.
- Diversification: Investors should view foreign investments as a kind of diversification. In terms of industry, company size, area, and investment type, the objective is to have various forms of investments. Generally speaking, diversification reduces portfolio risk and adsorbs momentary market volatility. Whenever the share market in one region of the world collapses, having certain investments in another region may be beneficial thanks to global diversification.
- Gains from rupee depreciation: You could earn significant returns on investments given the Indian rupee’s steady decline.
- Investment in top companies of the globe: The possibility for growth in certain global economies, especially in emerging countries, can be explored by investing in international stocks.
- Investment in upcoming themes: Thematic investing has picked up a lot, and if you’re an investor looking to maximise returns, investing in stocks of a particular theme can be fruitful. For example, AI and machine learning are a theme where you can invest in stocks in companies that specialise in this domain.
- Protection of your investments: The security of investments from fraud and liquidations is another important advantage of international investing. Strong laws that guarantee good corporate governance and harsh punishments for market abuse are often in place for developed market enterprises. This shields novice investors from scams and losses due to insider trading. Although many overseas financial institutions provide security from seizure and other dangers like the dissolution of the broker-dealer, keep in mind that investment is always at risk.
- International Credits: You may have easier access to finance in other nations, which would enable you to use more leverage and earn a higher return on your stock investment.
- The ability to access markets with various risk-return profiles: You must be prepared to assume more risk if you want to maximise your rewards. You may find an alternative risk-return profile in emerging markets.
- Enhances the local capital markets’ liquidity: A greater range of investments could be financed as markets go deeper and broader and more liquid. Savings can be invested in with the knowledge that if you require access to your money, you will be capable of managing their portfolio or rapidly selling their financial securities.
- Encourages the growth of equity markets: As funding becomes more competitive, the market will reward excellent performance, potential, and corporate governance. Equity prices would become value-relevant for shareholders as the market’s functioning and liquidity grow, ultimately influencing market efficiency.
What are the types of international stock markets?
There are two types of global stock markets:
- Countries with established industries, extensive infrastructure, stable economies, and a generally high level of living are home to developed markets.
- Emerging markets are found in nations with less stable economies and emerging capital markets. They may, however, be going through a quick growth phase as they are thought to be migrating into mature markets.
Understandably, developed markets’ volatility levels and range of possible returns are comparable to those of the United States. The potential results are more varied and more variable in emerging markets than in mature countries. You should keep your exposure to emerging markets at a reasonable level.
How to invest in foreign stocks from India?
With all the reasons justified above, the possible question on your mind must be, “how can I buy foreign stocks from India?” Here is how!
- Direct Investment
There are tie-ups between several domestic brokers in India and stockbrokers from the US. These brokers would function as intermediaries while executing your trades. If you are wondering how to buy foreign stocks in India, then opening an account with Stockal is one such method. Opening an account with Stockal is hassle-free and can be done within minutes.
It comes with an easy interface and allows you to transfer funds easily. They have fractional investing as well. Make sure that you are opting for an investment app that comes with zero brokerage, no maintenance charges, and has an option of free account creation for your own benefit and ease.
However, you must remember that this method has its own set of restrictions that you need to be careful about. Depending on the brokerage firm you have opted for, there will be certain rules and regulations or perhaps the number of trades you are allowed to make or on some of the investment vehicles.
The investment costs could differ due to the currency conversion and brokerage charges involved (if any). Therefore, make sure that you are fully aware of all expenditures involved in the process before you create your account.
- Indirect Investment
Just as in domestic investments, you could also go for the indirect investment methods when it comes to investing in international stocks. Here is how:
ETFs have direct as well as indirect routes that are available for you. You could either buy US ETFs through a domestic broker directly, or through an international broker. You may also buy Indian ETFs with international indices. The Stockal NASDAQ ETF, for example, includes easy onboarding, sturdy security, and timely notifications on investment opportunities.
- Stock Baskets
The advantage of investing in international stocks via stock baskets is that you will have access to custom stocks depending on various sectors. The Stockal Blue Chip Tech Stack, for example, makes investments in purely technological internet companies which are vital to the industry and possess MOATs or competitive advantages within their operations.
- Global Focused Indian Mutual Funds
You can also participate by choosing US-focused global mutual funds. These funds contain multiple assets, some of which will also have exposure to international stocks, although very limited. You are not required to create an overseas trade account or ensure that you are maintaining a minimum deposit, which is usually the case when it comes to direct investment options with brokers involved.
A global-focused mutual fund would allow you to primarily invest in equity-related or equity instruments. These instruments would be of listed entities of the foreign market.
Financial Resources for International Investment Portfolios
Equities, bonds, and derivatives are examples of common financial assets that can be obtained through foreign portfolio investment. These assets can be bought for a variety of reasons, but generally speaking, high rates of return and risk reduction through geographic diversification are favourable influences on international portfolio investment.
Things To Remember
Currency changes are another form of volatility that affects investments made in global markets. This is particularly valid for bonds issued abroad. Consider international investments that are hedged in U.S. dollars to reduce such volatility.
Understanding the variables that could affect your returns requires knowledge of the political as well as economic landscape of the nation in which you are making an investment. As an investor, you should always keep your investment goals, costs, and potential returns in mind while balancing those aspects with your risk tolerance.
To attain significant portfolio diversification, investing in foreign stocks has become imperative. While the advantages are considerable, you must consider the hazards. Online resources abound with data that may be used to assess risks and determine the ideal asset allocation for your portfolio. Before making any investment decisions, you can also speak with your financial counsellor.
Given the economic and demographic advantages to be anticipated, our country continues to be a top investment destination. However, it always pays to be able to ride the same economic upcycle of other nations at the same time while benefiting from diversification.