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Investing Globally

I am in my mid-twenties and am building up a portfolio for retirement. Although I have invested in a good number of Indian equity funds, I wonder if it would be a good idea to invest in Principal's new Global Opportunities Fund.

I am in my mid-twenties and am building up a portfolio for retirement. On the fixed instruments side, I am banking on Provident Fund contributions whereas on equities side I am building a portfolio of mutual funds and stocks. Although I have invested in a good number of Indian equity funds, I wonder if it would be a good idea to invest in Principal's new Global Opportunities Fund.
Urvil Modi

It is always good to find investors thinking about their retirement at an early age. The earlier you put in money the more the chances that it will work for you, due to the power of compounding. Five extra years can make a huge difference even if the amount invested is not very big.

Principal Global Opportunities gives you an opportunity to invest in overseas equities. This opens up an avenue to diversify your investments across countries. Admittedly, Indian markets have performed better than most other equity markets and this is reflected in the relatively poor showing of the MSCI Global Index.

Nonetheless, the point to remember is that diversification is a risk mitigation tool. You may indeed get higher returns from Indian markets but there is no guarantee of this. Diversification is thus a response to this uncertainty. Another way of looking at this is that at present all equity investments would be made in companies listed in India. If Indian markets take a hit, all your investments would be impacted. By having some part of your portfolio outside India, you are reducing your India-specific risk. In view of this, investing a small part of your portfolio in such a scheme is taking the principle of diversification to its logical conclusion.

Another plus of this scheme is that as it is rupee-denominated, it gives you virtually unlimited exposure to foreign stocks. The $25,000 that RBI has allowed individuals to invest abroad remains untouched. Thus, the overall amount, which can be invested abroad increases.

But there are some limitations and risks to this scheme. First, the SEBI will allow this scheme to invest only in foreign companies that own at least 10 per cent equity in a listed Indian company; thus, the potential universe is restricted. Specifically there are no companies in the technology and finance sector for the fund to invest in. As a result of this, the fund will remain concentrated in other sectors.

As the scheme will invest in other currencies, investors will also be exposed to exchange rate risk. However, as the scheme is diversified across geographies, this risk should be reduced. It also goes without saying that all the risks associated with equity investing will also be there.

At the moment, however, this fund is your only choice if you wish to invest in overseas markets. Over time other funds should also be launched and this will give you a wider choice.

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