Can global diversification lower volatility, boost wealth?

Indian investors often believe that sticking to domestic markets is the best way to build wealth. After all, India is one of the world's fastest-growing economies. However, if the recent global market sell-off has proven anything, it's that relying solely on one country—even a strong one—is risky.

Since late September 2024, Indian equity markets have been on a downward trajectory, shaking investor confidence. The Nifty 500 TRI has witnessed a sharp correction of 18.1 per cent, as of Mar 4, 2025. However, investors who diversified globally had a smoother ride compared to those solely invested in Indian equities. For instance, if an investor had allocated 25 per cent of their portfolio to the S&P 500 before the downturn, their overall portfolio would have declined by 12.5 per cent, which is 32 per cent less than a fully domestic portfolio (Nifty 500 TRI) as of March 4, 2025.

This stark difference underscores the power of global diversification. This strategy not only cushions against market volatility but also provides access to some of the world's strongest businesses and resilient economies.

Global diversification reduces volatility

Let's take a look at historical data as well. Whenever the Indian stock market (Nifty 500 TRI) fell by more than 15 per cent, portfolios that included US equities performed better than purely domestic portfolios.

The graph below compares the performance of different portfolio combinations during major downturns, including the recent market fall from late September 2024 to now:

Global diversity adds more wealth

Over the long term, global diversification has not only helped in reducing volatility but also in enhancing portfolio growth. Portfolios with even a modest allocation to US equities have performed better than a 100 per cent India-only portfolio, benefiting from different market cycles, sectoral strengths and currency appreciation.

While Indian equities have delivered strong returns, amassing Rs 1.1 crore in around 20 years from a monthly SIP of Rs 10,000 as of March 1, 2025, portfolios with a 25 per cent international exposure to the US (S&P 500 TRI) would have grown to Rs 1.2 crore.

Additional benefits of global diversification

Beyond reducing volatility and enhancing long-term growth, investing internationally provides two key advantages. First, it grants access to some of the world's most dominant companies—Apple, Microsoft, Amazon, Google (Alphabet) and Tesla—which are absent from Indian markets.

Second, global investing offers a currency advantage. The Indian rupee has depreciated at an average rate of 3.6 per cent each year against the US dollar over the past five years. This means that even if US equities deliver returns similar to Indian markets, currency appreciation provides an additional boost for Indian investors holding USD-denominated assets. Over time, this currency movement has enhanced real returns, making international diversification not just a hedge against domestic risk but also a means to strengthen portfolio growth.

How to invest in international equities?

The easiest way to gain international exposure is through mutual funds that invest in global markets. However, due to RBI restrictions on overseas investments, many popular international mutual funds have stopped accepting fresh investments.

That said, some high-quality international mutual funds are still open for new investments—but choosing the right one is critical.

Wondering which international mutual funds are still open for subscription and worth buying? Subscribe to Value Research Fund Advisor now for exclusive access to our curated list of the best global investment options.

Also read: Debt mutual fund with 22% return! Should you invest?