Overseas investments - A fact check

Historical performance of FoFs

There may have been shorter periods when the equity markets in certain countries would have delivered superior investment returns than those delivered by Indian equity markets. For example, looking at the performance of a few FoFs, some funds investing in the US equity markets have indeed delivered a higher investment return than the 11%-12% p.a. level achieved by investments in Indian stock markets:

However, over a sufficiently longer-term of say 25 years or so, the investors might not have earned a higher investment return by investing in overseas equity markets (although this was not permitted then), than what he might have earned by investing in Indian equity markets.

What about the future?

One could argue that past performance may not be a guide to what may happen in the future. Of course, there is no guarantee that just because historical investment returns were high, that the Indian equity markets would continue to deliver superior returns in the future too. It is possible that the future investment returns in India may be lower due to several factors such as:

• Low growth / profitability of Indian companies vis-à-vis those in other countries
• Appreciation of Indian Rupee vis-à-vis other currencies
• Geo-political instability adversely impacting Indian markets
• Etc.

However, if one believes in the overall “India growth story”, its demographic dividend (e.g. large pool of young and educated population, significant pool of middle-class with large savings potential), its democratic set-up enabling businesses to thrive etc., it would not be unreasonable to expect that over the long-term, the Indian equity markets may continue to deliver investment returns that are at least as high as, if not higher than, those available from equity markets from several other countries.

Hence, arguably, one should be more bullish about investments in the Indian equity markets in the future. So much so that even overseas investors (including non-resident Indians or NRIs) may find it more beneficial to invest a sizeable proportion of their portfolio in the Indian equity markets.

Are overseas investments for you?

Before investing in overseas equity markets, one must understand that there are additional risks involved in such investments. The key additional risks include:

• Unfamiliarity – Given that an individual may typically be unfamiliar with the business conditions, regulatory environment, geo-political situations etc. in other countries, he carries the risk of achieving sub-optimal investment returns or even complete loss of his investments in extreme scenarios.
• Currency movements – The currency exchange rates may fluctuate and may not move in favour of the investor. For example, if INR appreciates against other currencies in the future, the Indian investor’s overall return (in INR terms) will be lower than that delivered by the overseas markets.
• Taxation – Depending on the country and the selected method of investment, one may be subjected to additional taxation or tax deduction at source on the overseas investments.

However, in spite of the possibility of lower overall investment returns over the longer-term, some may still prefer making overseas investments for the following reasons:

• Funding for certain objectives – Individuals invest in some countries and currencies in order to fund for certain future obligations – e.g. funding for children’s higher education in the US / UK universities. This may allow them to hedge their risk of adverse currency exchange rate movements at the time of incurring such expenses.
• Risk diversification – Some investors diversify their risks from investments in India by investing a certain proportion of their portfolio overseas.
• Potential for higher returns over short to medium terms – As discussed earlier, there may well be periods in which one could achieve higher investment returns through overseas investments than what may be possible in India.

In conclusion, although there may be situations in which overseas investments will be appropriate, one may need to carefully consider the personal circumstances and the various associated risks before taking the plunge to invest in overseas markets. Also, if one decides to invest overseas, given the individual’s unfamiliarity with overseas markets, he may be better off investing through the FoF route available from the Mutual Funds instead of investing directly.