Earlier we wrote about why your wealth plan needs an international equity fund, read here. As choices in the category expand, you need to focus on more than just the right selection. You also need to decide whether your investment is just following the herd or if you are ready for it.
Even before you get to the point of selection, you need to be sure that the twists and turns of international equity are something you are ready to face.
If you’re not sure about this, then a quick dip into your existing portfolio can help you decide whether you are ready to embrace international equity or not.
Here are some checks you can use to ascertain the sustainability of choosing international equity for your portfolio.
Are you a first-time equity investor ?
Equity investing in long term portfolios is still in its nascent stages in India. Compare this to the number of investors who have embraced long term fixed deposits.
If you are just stepping into the world of equity investing, it’s not advisable to allocate to international equity too soon. Equity as an asset class is volatile on a daily basis, which means prices and move up and down, sometimes very sharply.
This is no different for international equities. Just that sharp shifts in price when the underlying asset is unfamiliar can be a lot more unnerving.
It’s best to first understand and get comfortable with short term volatility in domestic equities. Here you may have a basic understanding and information about what are the triggers behind price shifts. Build your patience and holding power for this asset.
Only when you can see yourself sustaining through corrections and volatile market trends, should you consider investing overseas where your access to both micro and macro-level information will be limited.
Have you thought of currency risk ?
Investing in domestic equities means that your returns are measured in Indian rupees. There is no currency impact on your investment.
This is not the same when it comes to investing overseas. Your rupee investment will get converted to the currency of the underlying stock or fund. On redemption, the proceeds will once again get converted back to rupees.
Thus, the direction of change in the relative value of the Indian rupee also makes a difference to your return. While this is currently perceived as a positive impact given the depreciating rupee, if you are unable to grasp outcomes of this risk, then monitor for a while before investing.
Are you too close to the goal ?
The attraction of investing in an international equity fund is the diversification it offers. There’s also access to business and industries which are perhaps not to be found in the domestic listed equity space. However, good businesses also go through cycles of ups and downs and their stock prices react in tandem.
If you are just learning of this diversification option, but are thinking of investing money for a goal which is two to three years from completion, then international equity with all its uncertainties may not be the right option for you.
It’s a difficult choice to invest in international equity funds. Don’t be in a hurry to climb that ladder. Get yourself accustomed to the basic risk of equity investing first. Then understand your need for diversification better, including currency diversification. Only then think about moving into this category of investments for your long term portfolio.
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