How to diversify equity portfolio with global equities

The Indian equity markets are on a dream run at present. In the first eight months of the calendar year 2021, Indian equity markets have delivered an impressive 20.5 percent return. And the trend has been more or less similar across the global markets thanks to the abundant liquidity unleashed by global central banks.

This euphoria is also leading to a record number of new investors coming in. While increasing awareness about equity investments is a good development towards the financialization of savings in India; it also calls for increased focus on certain fundamentals of investing and financial planning. One such basic yet crucial element is asset allocation and diversification.

In a bull market, investors tend to go overboard investing all their savings into equities, which is a dangerous move. It is imperative to invest in equities only as per one’s asset allocation. Here too, ensure not all your savings in parked in a single category of equity mutual fund. Based on one’s risk appetite, investment duration and financial goal, remember to diversify your equity investments. One such equity portfolio diversification option is to take exposure to global equity markets.

While the Indian equity market has out-performed most of the developed markets this year; this is just one part of the story. The other part is that this does not happen always, as per the past trends. So, markets around the globe perform differently each year, thus diversification to international markets may enable investors to earn better returns.

For instance, the NASDAQ- 100 index outperformed the Nifty 50 index six times in the last decade. Also, the strength of the US Dollar against other currencies including the Indian Rupee, also adds value to investments in the US index over a period of time.

When we look at long-term trends for 1-year, 3-year, 5-year and 10-year returns, the Nifty 50 index has outperformed the NASDAQ-100 and S&P 500 only once and that too in the current year (as of September 01, 2021). This means there is scope to make gains from global equities over the long term and should not be ignored.

Directly investing in global markets is a complicated and expensive proposition. The easier option is to invest into international offerings made available by domestic mutual fund houses.

If you are an investor looking to invest in themes and companies such as cloud computing, e-commerce, artificial intelligence and other such new-age companies, then the NASDAQ-100 index is the one to be considered. The reasons being, the index is home to global brands like Apple, Microsoft, Google, Facebook, Tesla and several other path-breaking companies. Through this index, one will gain exposure to opportunities in current and future technologies via some of the leading names in the technology space.

Another reason to consider this index is the market depth. The NASDAQ-100 market capitalization is almost 10 times that of Nifty-50. Even when it comes to the return profile, over the last six years, the NASDAQ-100 Index has generated an annualized return of around 35 percent.

There are a couple of options available to investors looking to invest in the NASDAQ-100 index. The caveat here is that most of it are in the fund of fund format. There is an ongoing NFO as well from ICICI Prudential Mutual Fund, which is an open-ended index fund that will replicate or directly investing into the constituents of the NASDAQ-100 index. One can initiate international investments with a sum as low as Rs 1,000 when investing through such offerings.

To conclude, if you are an investor looking to invest in new-age global companies then you could consider taking exposure to an index like the NASDAQ-100.