Building A Diversified Portfolio

Building A  Diversified Portfolio
Deepika Asthana - 20 October 2019

For a while now, India has made for a compelling investment story. A host of factors including a strong GDP growth, political stability and a growing working population that feeds the consumption story, have contributed to the allure of India as an investment destination. India offers compelling investment opportunities along the risk-return spectrum which investors can capitalise upon. Having said that, it is important for investors to build a diversified portfolio that not only meets their return requirements but also mitigates the overall volatility.

In the post liberalisation period, Indian equities have generated annual returns comparable to S&P 500 in Rupee terms. However, these returns have been accompanied with double the volatility, which means that the risk adjusted returns of the S&P 500 are superior. By creating a global exposure, investors may be able to achieve their desired portfolio return while mitigating overall portfolio volatility. For this to happen, it is imperative that the global asset’s correlation with the other assets in the portfolio is low to negative so that when domestic investment witness extreme volatility, these investments can smoothen portfolio returns. Such a portfolio should consist of balanced investments in global equities and bond. This will ensure that the investments are along the risk-return spectrum and are not likely to have a skewed impact on the portfolio. Additionally, investors also choose to invest globally to hedge their portfolios against domestic currency risk by holding foreign assets.

When considering investing in global assets, one of the key risks that one needs to be aware of is the regulatory risk. The laws and regulations for investments and currency repatriation differ from one country to another. Investors should not only adhere to the regulations of the specific geography but also be agile enough to respond to changes in the regulatory environment. Another risk that investors should be aware of is currency risk. When investing in global assets, an investor also exposes himself or herself to the volatility in currency movements and must take adequate steps to hedge the same. In addition to the two risks discussed above, investors also need to pay heed to geopolitical risks, locals market risks and liquidity risks. These are a reflection of the prevailing investment climate and can impact the investors’ ability to transact freely with minimum impact cost.

If you are looking to invest in global assets, then you must ensure that the investments are aligned with your overall asset allocation policy and that you are following the liberalised remittance scheme (LRS) laws and the RBI guidelines at all times.