The stock market has once again brought a smile on investors' faces. I was looking at news reports stating that prominent foreign brokerage CLSA has increased the weight allotted to India in its Asia-Pacific (ex-Japan) relative returns portfolio. Christopher Wood, its chief equity strategist has termed India the ‘world’s most exciting stock market story’ in his newsletter, Greed & Fear. India is shining and the stock market is on a roll. In terms of market capitalization, India now features among the top 10 stock markets of the world.
A trait that I have noticed in investors is that once the market gallops ahead, they get carried away and question the viability of asset allocation including global investing.
When I talk of global investing, I always relate to it as part of asset allocation. When investors talk about asset allocation and diversification, they instantly think equity and debt and a further break down within these categories. For instance, within equity, they will attempt to diversify their investments across market capitalisation. Within debt, they will think along the lines of fixed-return products and debt funds. I strongly believe that by ignoring global investing when planning for diversification, investors are using only a fraction of the weapons in their investing arsenal.
Right now, with investors believing that all the money to be made is in India and with the tax on debt funds being changed, global funds are not on the most popular list of investments. This is a grave error that they are making.
Why global exposure helps
Not only does global investing give an exposure to another market and currency, but also to stocks which are not available in India. You enjoy your Coke, are hooked onto the coffee at Starbucks, and swear by your Dell laptop. Then why not invest in these stocks?
As is the case with stocks, so is the case with sectors. Look at e-commerce. If you are watching television in India, you are being bombarded with ads of Flipkart, Snapdeal and Quikr every day. It’s a sector which is booming globally with companies like Google and Amazon becoming household names. Confining the investment universe to Indian stocks does not give you exposure to this exciting sector. To meaningfully participate in industries like semiconductors, casinos, and online gaming, investors are forced to look outside India. Another instance is mining companies where the options are few in India. It would be wiser to look at a global mining fund. If you want a specific exposure to gold mining stocks, you are forced to look beyond the country’s borders.
So how do you invest in these stocks and sectors? The easiest way is to invest in a global fund. And mind you, I am not hard selling investing in a U.S. fund. There is no one market that performs year-after-year. Last year the U.S. stock market was on fire. Does that necessarily mean it will have a great run over the next two years? No. Not so very long ago, everyone was questioning whether the BRIC (Brazil, Russia, India, China) story is dead. All I am trying to do is drive home the point that there are great companies abroad whose growth you can benefit from if you look for a good international fund.
The tax aspect
In the most recent Union Budget, Finance Minister Arun Jaitley increased long-term capital gains tax on debt mutual funds from 10% to 20%, while the holding period has also gone up from 12 to 36 months.
The Union Budget strategy report stated that the long-term capital gain arising on transfer of a unit of a debt mutual fund shall be chargeable to tax at the rate of 20% after allowing indexation, instead of 10% without indexation. This applies to international funds since they are taxed just like debt funds.
Investors are now pondering whether or not they should get into such funds because it now means that they have to hold on to the fund for at least three years to avail of long-term capital gains. I do believe this is a very myopic way of viewing investments.
Any investment in equity, whether domestic or global, must have a time frame of at least five years. If you do make money before that, consider yourself very fortunate. But investing in equity means that you invest in businesses which go through ups and downs and are affected by cycles. You must learn to stay on and ride the volatility.
Let’s say you invest in a mining fund. The stock prices of these companies have been beaten down mercilessly over the past few years. But does that mean investors have lost their money? Not at all. It just means that investors need to stay in for the long haul when it comes to equity. Demand, over the long-term, will not slow down. Reserves are, by and large, being depleted faster than they can be discovered and once discovered it takes a few years for a mine company to start producing that metal. So for all purposes, they are a good investment. Again, I am not suggesting that investors buy into a particular theme, all I am saying is that investors need to understand that any investment in equity is always for the long haul and the change in tax regulation should not pose to be a hindrance.
This article has been written by Aditya Agarwal, Managing Director, Morningstar India and initially appeared in Mint.
