The global investment boom and decoding an interim hurdle

For example, global equities act as an essential source of diversification in Indian equities by improving the risk and returns of the portfolio. Diversification comes from holding securities of different countries and diversifying currency exposure. For example, history shows that investing in US dollars alone would have increased the Indian investor’s portfolio returns by 2-3% annually. Indian investors use two routes to access the international market: International Mutual Funds (Funds of Funds) in India and the RBI’s Liberalized Remittance Scheme (LRS).

Indians have invested over $4.5 billion in the last five years under the Fund of Funds route. Similarly, under the LRS, he has remitted around $500 million annually to invest in equity and debt securities. Investing in Fund of Funds is like investing in any SEBI-regulated mutual fund in India. Benefits of this route include low minimums, rupee execution, and ease of access through various Indian asset management, wealth and online platforms. However, the drawbacks include the limited mutual fund scheme universe in India as compared to the more than five lakh schemes available globally. Nevertheless, India has come a long way in providing access through such schemes.

On the other hand, investing under LRS has additional benefits such as access to a larger universe, lower expense ratio and custody of assets in jurisdictions such as the US or UK. In addition, the structure allows investors to use these funds for future liabilities in those countries, such as children’s education, foreign travel, or overseas asset purchases. However, the investment limit under the LRS is $250,000 per investor per fiscal year, requiring remittances in foreign currency and in some cases opening a foreign brokerage account. While these are one-time dedicated activities, we are of the opinion that investing under LRS offers unique opportunities in foreign markets – for example, investing in secular trends such as artificial intelligence, big data, autonomous driving, climate change and blockchain.

Recently, the Fund of Funds has come under the scrutiny of SEBI, where collective investment in such schemes has come close to the permitted aggregate limit of $7 billion. Last week, SEBI directed all AMCs to stop accepting fresh inflows into schemes that may violate such limits. We believe that the current industrywide range does not represent the modern-day scenario, especially given India’s economic output, market capitalization and international trade volume. We feel that sooner or later, SEBI will refresh this limit to allow fresh inflows. By raising such thresholds, India Inc. will redeem itself to the global investment community and demonstrate its competitiveness in the 21st century. Our outlook for India remains optimistic, with GDP growth expected at around 9.2% for FY 2022-23. The government’s pro-business policies, from PLI and Make in India schemes to infrastructure and IT spending, will bring India closer to its $5 trillion GDP target.

On the other hand, Western economies such as the US and UK will see slower growth than in 2021 as they normalize from the effects of the pandemic. However, slow growth does not necessarily translate into lower market returns. Instead, it means that returns in these markets can come from different pockets or sectors such as secular growth engines in consumer, IT and hardware. Therefore, while the Indian markets may continue to provide positive momentum due to the secular growth story, the rest of the world will continue to provide diversified growth opportunities, unrelated to the Indian markets. Historically, we have seen that no one market dominates on a year to year basis. Therefore, investing a portion in different countries will yield better results than investing all your eggs in one basket, i.e. India. We recommend a global allocation of between 5% and 15% across a diversified portfolio depending on the risk profile of the investor. In an all-equity portfolio, this allocation can go up to 25%. In our portfolio, we allocate thematic funds versus global or regional managers to provide the fund manager with a broad investment universe to outperform the market. Thematic funds are cyclical and work well in a strategic portfolio where the fund manager can change the allocation or eliminate such funds. Since we have built portfolios over the long term, we believe compounding returns will come from a diversified mix of securities with solid cash flow and earnings growth.

Vaibhav Porwal is the co-founder at Dezerv.