How diversification in US stock market helps Indian investors


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By Shruti Jain

Successful investing requires a diversified portfolio and a focus on the long haul. Yet, most Indian investors are limiting themselves by holding a disproportionate amount of domestic-based investments in their portfolios.

Diversification is not just about investing in companies in different sectors and of different sizes. It’s about different asset classes, geographies, currencies, interest rates, and economies. It’s important to understand that investors’ exposure to risk grows the more they concentrate their assets in one country or smaller geographic regions.

Building a portfolio that combines domestic and foreign investments can actually reduce risk by achieving a more diversified mix of assets. And it can present new and unique opportunities for growth. A diversified approach also has the potential to help smooth out differences in country-specific rate hike cycles, inflation, fiscal policies, and other uncertainties.

Even the most conservative investors have the potential to benefit from an allocation to international stocks. Conservative investors can allocate up to 5% of their total portfolio to international equities, while aggressive investors may consider allocating as much as 30%.

Why to invest in U.S. stock market

Apart from the fact that the U.S. has been the world’s leading economic powerhouse and has the biggest gross domestic product (GDP) (i.e., the size of its economy) in the world, there are several other reasons why your portfolio should have exposure to U.S. stocks.

Also Read: Are the Wall Street investment bankers ‘stealing’ your money?

Market Capitalisation and Exposure

The U.S. accounts for approximately 46% of global equity market capitalization (i.e., the total value of all publicly traded corporations in the world) making it the largest equity market in the world. It is also the deepest, most liquid, and most efficient market.

Its sheer size and scale mean the biggest and most valuable companies, not just from America but from all over the world like Japan, China, Europe, trade in the US. In fact, nine of the ten world’s largest companies, like Alibaba, Apple, Netflix, Meta, Tesla, TSM, Accenture, Toyota, and Amazon, are listed there. By simply diversifying your portfolio into the U.S. equity markets, you can get exposure to major corporations and global brands from around the world.

Also Read: Stock market expecting Fed to be less aggressive ahead of next FOMC meeting

Strong Currency

The U.S. dollar is one of the strongest currencies in the world. We all know that the Indian Rupee has been getting weaker against the U.S. dollar over the past decades. Holding U.S. investments naturally gives exposure to their dollar. This will give a natural boost to your investments (with dollar appreciation) and can also help shelter against volatility during a market downturn.

Access to sustainable investment options

For conscious investors focused on investing in sustainable and/or ethical companies, there are very limited investment options in India in the listed spectrum. Most companies working on solutions to combat the climate crisis are at a very nascent stage and have a long way to go for their listings. Moreover, ironically ESG funds in India include companies that are far from being paragons of social and environmental responsibility. These funds hold investments in fossil-fuel producers, companies involved in coal-mining, and tobacco, and even companies touted as the world’s biggest polluters.

Fortunately, there are lots of options once you look beyond Indian equities. Vegans looking for plant-based investments can look into companies like Beyond Meat, Oatly and Tattooed Chef, for EV enthusiasts there are options like Tesla, NIO, Lucid Group, and Wallbox, if you are passionate about circular economy you can explore Ball and Tomra. They’re all listed on U.S. bourses.

As an investor, if you are passionate about exchanging rupees for a difference, adding a flavour of international equities is the best way to do it.

Ways to gain exposure

For most investors, the easiest and most cost-effective way to invest internationally is through exchange-traded funds (ETFs) and mutual funds. ETFs can be used as cost-effective and convenient “building blocks” of your globally diversified portfolio. Investors new to global investing might also consider international funds that provide diversification and exposure to U.S. stocks and even other global markets.

(Author is CSO, Arihant Capital)

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