The stock market is witnessing huge volatility and investors have lost 20-30 percent of the returns over the last one-two months. With index valuations at historical lows, is it the right time to sell equity and buy other asset classes?
Diversifying portfolios by selling equity and buying other asset classes such as debt, gold and real estate might seem like the right thing to do. But it is not.
Selling equity now would mean converting paper losses into actual losses. However, investors who want to deploy money and diversify international funds, offer a great opportunity. Why?
Portfolio diversification
We have seen over the last two months that however diversified one’s investment is, equities fall together. Whether someone has invested in five or even 50 mutual funds, they have seen a decline in portfolios of over 20-30 percent.
Diversification across different asset classes has proven to be effective in these times. If someone had diversified his/her investments in gold, international equities, debt and equities, their short-term portfolio loss would have been much lower.
How does international diversification fit into this?
International investments have fallen less and over long periods have very low correlation with Indian equity markets. By taking out country risk, investors are making their portfolios less volatile.
For example, correlation of international indices such as the NASDAQ and S&P500 with Indian indices is less than 15 percent. What this means is that investors choosing to diversify with international funds can expect their portfolios to move differently to Indian indices (just like gold).
Global factors
Need for international diversification comes at the point where India is becoming more global. In addition to our spending patterns, business models are getting a lot more global. We all use Flipkart, Amazon, Instagram, WhatsApp daily.
Today, Maruti is competing with Kia or Hyundai. With these forces, the investment portfolio needs to evolve with competitive trends. Having brands such as Amazon, Google, Facebook, Coca Cola in the portfolio enables investors to have the very best companies with them at all times.
The Indian market is small in comparison to global standards and having global exposure allows investors to who grow with some of the biggest companies out there.
How does one do it?
There are multiple international funds in India today. Unlike LRS, where investors have a cap on remittance, international mutual funds in India do not have any caps on investing abroad.
By choosing index funds (most popular and proven to be effective), investors can ensure low fees while getting exposure to the best companies globally. Data shows that index funds beat 90 percent of all active funds in the US over the last 10-15 years.
In conclusion, an investor should not sell equity to diversify. He/she should look at buying international funds to ensure a diversified portfolio is in place for the next crisis.
(The author is Head of Passive fund Business at Motilal Oswal Asset Management Company Mr Partik Oswal.)
Disclaimer: The views and investment tips expressed by investment expert by Mr. Praik Oswal’s his own and not that of the website or its management.We advises users to check with certified experts before taking any investment decisions.