International investing has become vital for our portfolios as we take part in the global growth story. Adding international stocks to a portfolio offers diversification and may provide higher returns. However, there are both benefits and risks associated with global investing. We will cover a few significant ones in this article.
Benefits of Global Investing
a. Diversification
Diversification is the most obvious yet the most crucial benefit of global investing. A diversified portfolio acts as a source of stability during market volatility. When you spread out your investments across geographies, there is a low correlation between them. This means that the volatility in one market is likely not to affect your other assets.
Many of the US-listed companies have global revenues. Over 40% of the revenues of the S&P500 companies come from outside the US. By investing in the US itself, you can build a globally diversified portfolio.
b. Wide range of investment options
Global investing enables you to access investment opportunities that are not present domestically. Developed markets like the US are home to some of the world’s largest tech companies – something you cannot access by investing in India.
You may even choose a theme or a combination of multiple sectors. For example, you can prefer the US market for technology, Europe for engineering, and Australia for commodities. If you are interested in healthcare or pharmaceuticals, there are several options in the US and Europe.
You can access multiple geographies through ETFs. For example, you can invest in German equities through the US-listed EWG ETF or in the Brazilian market through the EWZ ETF.
c. Investment Protection
Another significant benefit of global investing is the protection of investments against fraud and liquidations. Developed market companies generally have strong regulations that ensure sound corporate governance and severe penalties for market abuse. This protects retail investors from potential scams and insider trading losses.
Remember, capital is always at risk, but many foreign financial institutions, offer protection from seizures and other threats such as liquidation of the broker-dealer. For instance, in the US, SIPC protects investments up to $500,000 if your broker-dealer faces liquidation.
d. Currency Diversification
Investing overseas exposes you to currency appreciation (or depreciation). For example, the USD has been appreciating, on average, between 3-5 percent versus the INR over the last few years. Emerging markets’ currencies depreciate over the longer-term. Interest rates in domestic savings accounts are at a low 3-4 percent on average.
By investing globally, portfolios have generally had the dual benefit of better markets and appreciating currencies.
Risks of Global Investing
The benefits of international investing are evident. However, one must also consider the risks that come with it. There are three risks that you should be aware of while investing globally.
a. Higher Transaction Costs
The most significant barrier to investing in global markets is the added transaction cost, which varies depending on the foreign market you want to invest in. For the US markets, Winvesta offers zero-commission brokerage, which is cheaper than even domestic investing. For many other markets, access may not be as inexpensive.
There may be additional costs like FX conversion charges, transfer fees, and annual maintenance fees that you should know on top of the brokerage commissions.
b. Currency Volatility
When investing directly in foreign markets, you first have to convert your Indian rupees into a foreign currency at the current exchange rate. Let’s assume you own a foreign stock for a year and then sell it. You then convert the foreign currency back into the Indian rupee. That could help or hurt your return, depending on which way the domestic currency is moving.
c. Political Risk
While investing, you should also consider the geopolitical environment of the country. Political events affect the domestic markets of the country and may lead to volatility. In developing markets, government and policy decisions could hurt even the most prominent companies. We have seen this frequently in countries like Brazil and Argentina.
Global Investing – Conclusion
International investing has become the need of the hour to achieve strong portfolio diversification. While the benefits are lucrative, you must pay attention to the risks as well. There is a lot of information available online to measure the risks and ensure your portfolio’s right mix. You may also consult with your financial advisor before making any investment decision. Start your investing journey today!
Contributed by Prateek Jain
He is the Co-founder & President of Winvesta. Before Winvesta, Prateek worked at Deutsche Bank for 11 years
FAQs
International investing opens up a world of opportunities, offering diversification, access to growth, and potential currency gains. However, it's essential to weigh these benefits against the risks of currency fluctuations, political and economic instability, and regulatory challenges.
What is global investing and its benefits? ›
Wide range of investment options. Global investing enables you to access investment opportunities that are not present domestically. Developed markets like the US are home to some of the world's largest tech companies – something you cannot access by investing in India.
Is there any risk in global investing? ›
Investing internationally provides diversification and potential for growth, especially in emerging markets, but it comes with a set of risks. Among them, the main ones are the higher costs, the changes and fluctuations in currency exchange rates, and the different levels of liquidity in markets outside the U.S.
What are the benefits and risks of investing? ›
Investing in stocks offers the potential for substantial returns, income through dividends and portfolio diversification. However, it also comes with risks, including market volatility, tax bills as well as the need for time and expertise.
What are the pros and cons of investing overseas? ›
Offshore investing is beyond the means of many but the wealthiest of investors. Advantages include tax benefits, asset protection, privacy, and a broader range of investments. Downsides include high costs and increased regulatory scrutiny that offshore jurisdictions and accounts face.
What causes global investment risk? ›
Key Takeaways
This uncertainty can come from any number of factors including political, economic, and sovereign default risk. In general, countries are categorized into three levels of development: frontier, emerging, and developed markets, which are characterized by decreasing levels of country risk accordingly.
What is an example of a global investment? ›
For example, you can invest in commodities in Australia, engineering space in Europe, or technology in the US market. You can also invest in various countries through ETFs. The global investment brings you the opportunity to invest in industry giants globally.
What does global investment risk affect the most? ›
Global investment risk encompasses many different international risk factors, including currency risks, political risks, and interest rate risks. Currency risk is associated with fluctuations in a foreign currency relative to the U.S. dollar.
What is a global investment? ›
Global Investment or International Investment is a strategy of selecting the global-based investment options for your portfolio. These investments include options like Mutual Funds, exchange traded funds and direct investments in foreign markets.
What are the cons of foreign investment? ›
Some potential disadvantages of foreign direct investment (FDI): The host country can lose control over its economy, and people may lose jobs if companies relocate production to lower-cost countries. There can be negative impacts on the environment from foreign investment in extractive industries.
In one's personal life, taking risks can lead to new experiences, self-discovery , and personal growth. On the other hand , taking risks can also lead to negative consequences such as financial loss, failure, and disappointment. In such cases the human element is what becomes important.
What are the advantages and disadvantages of a risk investment? ›
High-risk investments may offer the chance of higher returns than other investments might produce, but they put your money at higher risk. This means that if things go well, high-risk investments can produce high returns. But if things go badly, you could lose all of the money you invested.
What are the pros and cons of investing in funds? ›
Mutual funds have pros and cons like any other investment. One selling point is that they allow you to hold a variety of assets in a single fund. They also have the potential for higher-than-average returns. However, some mutual funds have steep fees and initial buy-ins.
What are the benefits of investing in international shares? ›
International shares can be a good investment as they offer diversification benefits, growth potential, and exposure to global economic trends. However, they also come with risks, such as currency fluctuations and geopolitical uncertainties, so it's essential to research and consider these factors before investing.
What does global investment mean? ›
Global investing involves investing in securities that originate all around the world. According to Charles Schwab , global allocation provides diversification benefits and is the pillar of wealth management. It can also help investors position your portfolio for long-term growth.
What do you mean by global investment? ›
Global Investment or International Investment is a strategy of selecting the global-based investment options for your portfolio. These investments include options like Mutual Funds, exchange traded funds and direct investments in foreign markets.
What are benefits of global? ›
Economies of Scale: Global expansion can also help companies to achieve economies of scale, which can lead to cost savings in areas such as production, procurement, and distribution. Reduced Dependency on One Market: Expanding globally can also reduce a company's dependency on a single market.
What are the benefits of being a global company? ›
6 key benefits of international business
- Access top talent on a global scale. Employees are a company's most valuable resource. ...
- Improve cost efficiency. ...
- Leverage financial incentives for entering new foreign markets. ...
- Expand your customer base. ...
- Increase consumer trust within overseas markets. ...
- Cultivate competitive advantages.
