In India, international funds have seen record flows over the last 12 months. International investing has become a big theme and as more and more investors accept global diversification, it’s essential not to get caught up by the high returns generated. Let’s keep in mind that the high returns in the past in a particular asset class rarely continue over long-time periods. Investors who are jumping in today because they missed on returns in the past should be aware that their investments will not fare well over the long term.

So, if they are not going to get high returns, why should one consider an investment overseas?

Diversification of portfolio: Adding international funds lowers portfolio volatility for investors. How? History has shown that global markets move in a different direction from the Indian markets. Hence, when the Indian markets perform poorly, global markets keep our portfolios stable (even our emotions). It has been seen that an allocation of 50 per cent of our portfolio in a global portfolio can reduce volatility by 100 per cent.

Dollar protection: Today, many investors spend their hard earned savings on vacations abroad and international products. Also, the number of students leaving India and going abroad has exploded over the last decade. Vacationers and school-goers have noticed that the dollar keeps on getting more and more expensive every year.

In the last decade, the dollar used to cost around Rs 50. Today, it is close to Rs 80. International funds provide access to some of the world’s largest companies and give investors the ability to invest in dollars, thus protecting investors from future devaluation.

International growth opportunities: Today, most investors buy and hold ITC, Hero Honda, HUL in their investment funds but buy Apple iPhones, Hyundai Cars, H&M clothes, Windows laptops, Adidas shoes and use Airbnb instead of hotels. The reality is that the world is more open, and buying Indian stocks is not enough to create wealth.

International funds enable investors to participate in the world’s biggest companies and brands. Stocks of companies such as Facebook, Apple, Google can be easily accessed via international funds. So, how does one go about doing this?

• Use mutual funds for easier access: Investors looking at global funds can either set up brokerage accounts in the US or buy mutual funds directly in India. Setting up brokerage accounts can be time-consuming and expensive but can be useful for investors looking for choice. Mutual funds, however, are cheaper and more convenient. Purchase and redemption are simple as also setting up monthly investments (SIPs). There are no limits when it comes to investing abroad via mutual funds.
• Use index products: Index funds have proven a lot more popular when investing in developed markets such as the US and Europe. They are low cost and deliver the highest performance over long periods. Most importantly, they are simple enough for investors to hold on to for decades.
• Don’t stick to US funds only: American markets have had a great run over the last 10 years. Investors looking for diversification should also look at other markets. It is impossible to time the markets perfectly. Hence, investors looking for global diversification should look for the US, emerging markets and other developed markets for their exposure.
• Stay away from speculation: History says that more than 95 per cent speculators/traders don’t make money. Most of them lose money. Investors who are trading with the impression that they are building their wealth should keep this in mind and remember that all the best investors and entrepreneurs create wealth via compounding, which takes many, many years. Getting rich slow is boring — but that’s, unfortunately, the only proven way.
• Have a large allocation: A 3-4 per cent allocation to international funds has close to zero impact on diversification, essentially making global funds just another fund in the portfolio. For investors looking for low correlation, dollar protection and diversification, allocation needs to be significant (more than 10-15 per cent of the portfolio).

As the world becomes global and as Indians become more international spenders and vacationers, it’s important to diversify investments in the same way. A $1,000 smartphone is a $1,000 smartphone for an average American at all times. For an Indian, it was Rs 45,000 10 years ago; today it’s Rs 70,000 and tomorrow it will most probably be much more.

In conclusion, investors who are looking for diversification opportunities should explore global investing. While India is a large and significant country, it remains less than 4 per cent of the worldwide GDP. Hence, Indian investors today are missing out on a major chunk of wealth creation opportunities outside India.

The writer is head of passive funds business, Motilal Oswal Asset Management Company