Foreign stocks make sense now

Directly investing in foreign stocks is perfectly feasible for Indians, and more people should be doing this

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It's now been 15 years since Indian equity investors were first permitted to invest directly in foreign equities. If you'd wanted, you could have ridden Google, Amazon, Facebook and other blockbuster stocks (Domino's?) during these years. Added to the more-or-less continuous fall of the rupee, it would have fetched you truly blockbuster returns.

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For example, after the dust had settled on Google's IPO in 2004, it was clear to a lot of people that this could be a great company. The IPO price was $85, but let's say you had bought it a little later at $100. That investment would be about 20 times now, allowing for a stock split when it was restructured as Alphabet in 2016. On top of that, in September 2004, each $100 dollars would have cost you about Rs 4,600 whereas now they would be worth Rs 6,800. So, all in all, that's a gain of about 30X.

Of course, practically no Indian actually did this. Through most of these years, taken as an aggregate, the Indian equity markets were doing better than foreign ones and Indian investors were quite inward-looking, which they still are.

Foreign investments for individuals is essentially a type of diversification. Diversification is one of the core tenets of investing. The idea is that different kinds of investments--different by type, industry, size, and geography--generally tend not to do badly all at once. When some do badly, others do better. The logic of investing across different countries seems unbeatable. If the stock markets of one part of the world does badly, then having some money in another part would offer protection.

It so happened that in the years immediately following the opening up, the Indian stock markets offered some of the highest returns in the world and obviously, Indian investors paid no attention to foreign markets. In fact, most atypically, even the foreign exchange rate favoured India during 2003-07, and US Dollar fell from 47.66 to Rs 39.37 to a rupee. As we saw above in Google's case. the general long-period trend is of the rupee losing value against the USD, and this helps Indians who invest abroad, with dollar gains acting as a booster dose to whatever is happening to your investment themselves.

Then came the great financial crisis of 2007-08. Domestic stocks collapsed, but foreign ones collapsed just as badly. In fact, the entire financial crisis was triggered by American problems. Clearly, when the whole world crashes then having a little more in one market than the other wouldn't have saved you from anything. Therefore, as it turned out, 2003 to 2008 was the worst starting experience for investing around the world that Indian could have had. First, the Indian markets had an exceptional bull-run, and then there was a rare synchronised global collapse.

However, despite all this, global investing is now a worthwhile diversification. In fact, this was proven during the period immediately following the financial crisis. From the end of 2007 to the end of 2013, the BSE Sensex generated total returns of 4 per cent, while a rupee investment in the US markets would have doubled your money.

All in all, if equities are a part of your long-term investments, then a certain part of it (perhaps 10 to 20 per cent) should be invested globally. There are a number of Indian mutual funds available for this, and there are Indian brokers, and of course one can invest directly too.

All in all, investing some money in foreign stocks should be a routine option of global diversification for all Indian equity investors. It may look like a better idea at some point of time and not at another, but on the whole, it's bound to be an advantage.

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