Designing the right beginner’s portfolio for the global Indian investor
Premium- An investor with a longer horizon may choose higher equity allocation
In recent years, innovation in financial products such as mutual funds and exchange traded funds (ETFs), coupled with simplified access through online brokers, have made global investing more accessible. And investing globally can be beneficial in several ways:
Diversification — A global portfolio reduces the chances of any one country or region having an outsized impact on your portfolio.
Broader opportunities—Get to participate in the growth of economies outside India. Large multinationals like Apple, Microsoft, and Nestle trade on the US and European exchanges.
Balanced risks—Investing in lower risk assets such as the US government bonds may provide stability during recessions. Real estate or commodities offer protection from inflation.
Currency protection—Investing globally can benefit investors should the rupee continue to depreciate.
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Global investing has several benefits. However, building a portfolio that allocates across multiple countries and asset classes can seem like a daunting task. It doesn’t need to be. A well-designed portfolio aligned with an investor’s objective and risk appetite will maximize the likelihood of compounding wealth. The following steps may help in designing an appropriate portfolio:
Define your goals: Why are you investing? What is your time horizon?
Recognize your limitations: Do you have time to do research? What is your risk appetite?
Construct a portfolio that reflects your goals and limitations.
Let’s review an example for a college savings plan managed by Voya (see table), where an investor’s goals and risk profile are translated into a globally diversified portfolio.
An investor with a long-time horizon or higher risk appetite may choose a higher equity allocation, while a conservative investor may choose a portfolio with lower equity allocation.
Within equities, a typical allocation may be based on the size of markets , in which case the largest allocation would be to US equities, followed by other developed markets, and then emerging markets. High quality bonds bring stability to a portfolio, especially in recessionary environments. A core US fixed income portfolio of the US government and corporate debt can provide this balance.
For portfolios seeking price stability, short duration funds (i.e. funds investing in bonds with shorter maturities) would be preferable over long. Inflation-linked bonds offer investors interest rates that rise or fall with inflation. These may be attractive during periods of higher inflation. High yield bonds offer higher interest rates but come with greater risk as they are generally issued by companies with lower credit quality.
Finally, alternative strategies such as commodities or real estate offer returns from sources other than stocks or bonds, but may not be appropriate for all investors.
A beginner investor can choose one of two paths — use ready-made diversified portfolios like the ones shown in the table. The investor only selects a time horizon or risk, and the fund does the allocation. Or, select regional, sector or thematic mutual funds and ETFs to build one’s own portfolio
Global portfolios can be constructed without having to select individual stocks or bonds. Mutual funds and ETFs that track global indexes can be used as building blocks. For example, a fund benchmarked to the S&P 500 index provides access to the largest US listed companies in a single fund. Similarly, funds provide exposure to specific regions (e.g. Europe, Asia), countries (e.g. China, Mexico), sectors (e.g. healthcare, industrials), size (e.g. US large, US small), or asset classes (e.g. bonds, commodities).
Investing globally provides access to a broader opportunity set. ETFs and MFs can provide investors with simple tools to get started. However, the most important aspect in successful investing is building a plan and sticking to it. Note that, global investing poses risks such as currency fluctuation, economic and political risks not found in domestic-only investments. Diversification does not guarantee against a loss.
Amit Sinha is head of multi asset design at Voya Investment Management. The views expressed here are personal and only for educational purpose.