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Why Indians’ love for home market can be their Achilles’ heel

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Morningstar did a study across 14 markets and found that Indian and Chinese funds both had the highest weights to home market, showing the investors’ preference for their home markets over other global markets. But in no other market was the divergence between funds’ weight in home market (see: map) and the market’s weight in global market index as stark as in India. Among the markets considered, India had the fifth lowest weight (2%) in Morningstar Global Equity Index.

After Indian and Chinese funds, US funds had the highest weight to their home market at 78%, but this is also to do with the fact that the US has the largest weight in global market indices.

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Why the bias?

Experts say the home bias comes from investors’ familiarity bias, as well as limited options for Indian investors. “It is only now that investors have several more options to choose from to take exposure to international markets,” points out Swarup Mohanty, chief executive officer, Mirae Mutual Fund.

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Compared to their weights in the global market indices (see: pie chart), funds in most countries have higher weights to their home markets. But their home market weights are still on the lower side, when compared to India, China and US. In the case of Germany, Italy, Singapore and Japan, it is under 30%. When it comes to New Zealand, United Kingdom, France and Canada, it is under 40%.

How country diversification helps

“International funds can give investors exposure to global companies, which have access to large global pools of revenues,” says Radhika Gupta, managing director and chief executive officer, Edelweiss MF.

This also brings currency diversification into your investments. “A US fund or other global fund will hold your investment in dollars. So, when rupee, along with other emerging market currencies depreciate against dollar — which is 2.5% on average — you actually benefit as you would be converting this investment into rupees on redemption,” Gupta points out. “For investors with financial goals related to foreign spending like children’s higher education, vacation, etc., this is a good option,” she adds.

But, should one start building geographical diversification at a time when Indian markets are doing well? Market benchmark CNX NSE Nifty 50 is the fourth best-performing index in the world in dollar terms.

Kaustubh Belapurkar, director, fund research, Morningstar, says geographical diversification should be built into the portfolio, irrespective of whether the home market is strong or weak.

“We have seen at different points in time, different geographies can do well. So, such investments can’t be timed. Instead, investors should take an asset allocation approach, and then re-balance at regular intervals, as per their targeted portfolio mix,” he says.

He points out that before the bull run in Indian markets starting from 2014, markets were quite flat. Around the same time, US market had done really well. Investor money had started to chase US funds, but then, returns had already been delivered in US funds. “So, the scenario changed post-2014, and then investor money even started moving out of global funds,” Belapurkar says.

US funds again started doing well in 2019-2020, and investor money started coming in these funds.

How portfolio re-balancing works

Let’s say you have decided to keep 15% exposure to international equities in your portfolio, but the fall in the international funds has brought it down to 10%, while favourable conditions have lifted domestic exposure to 90%. So, one can take profit in some of domestic exposure and move the proceeds to international funds; reverting to 15% international and 85% domestic mix.

This is how re-balancing works. You can do this at regular intervals to make sure you are maintaining the targeted portfolio mix.

What should investors do?

Investors can build their international allocation through passive funds tracking one of the two major US market indices – S&P 500 or Nasdaq 100. The former is preferable as it offers better sectoral diversification. In the case of Nasdaq 100, more than 50% weight is with US technology companies.

Passively-managed index funds and exchange trade funds (ETFs) take away the fund manager risk that comes with actively-managed funds. With passive funds, you get the market benchmark returns, but active funds can underperform market benchmarks. It is not easy for domestic advisors and investors to try and identify global fund managers that have the potential to outperform benchmark indices. If you get it wrong, the fund can underperform the benchmark index.

A US market exposure is preferrable for those starting to build international exposure, as US companies, given their large scale and size, have a large global presence across multiple geographies. The US also comes with a long history of capital markets and is a well-regulated market.

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