The Rush Towards Global Equities: Good or Bad?
Amazon, Google, Facebook, Netflix etc. have gone passed their highs and on an everyday basis reaching new highs. Do you think you should invest too?
The stock market pendulum has moved from pessimism to optimism in quite a short time. This swing has made a lot of investors interested in global investing especially investing in the US market.
Should you be invested in these stocks?
Simple answer ‘It depends’. (That’s my response to any investment.)
Benjamin Graham in his book ‘the intelligent investor’ wrote a chapter “Investment versus Speculation”.
An investment operation is one which, upon thorough analysis promises safety of principal and an adequate return. Operations not meeting these requirements are speculative.
When you are deciding on global equities, this fundamental rule does not change.
Often, I come across people who are purely speculating but they think that they are investing.
“Reliance is bound to grow”
“In the next one year, XYZ company will grow by 20%”
“India will be superpower one day”
“Covid19 vaccine will be developed in 2020”
And so on..
Be clear whether you are investing or speculating.
There is no harm in speculating but you have to acknowledge that you are speculating and not investing.
The right investment approach will always centre around knowing the knowable.
Howard Marks said:
"To make money, your investment decisions must be based on 3 keys:
Know the knowable (insight into companies and securities and industries)
Invest in a contrarian and counter-cyclical fashion"
I suggest, creating asset allocation bucket and global equity can be invested between 15-20% of the overall portfolio.
Now, what all are the options to invest in this global equity bucket.
1. Individual stocks
Under LRS route, you can transfer $250,000 per year outside of India. Recently, 5% tax collected at source (TCS) is applied for transfers more than Rs 7 lakhs.
Understanding a company is a very detailed task. All this effort is to increase your odds of success and still nothing is guaranteed.
Sitting in India, what do you know about companies in the US and elsewhere? The odds of success are anyways compromised. You may be a user and/or have access to the regulatory filling but you can’t develop a sense of the business remotely.
However, if you still decide to invest in individual stocks, you have a few options. Open broking account with Interactive Broker or some other broker than facilitates foreign investing. If you restrict yourself to the US market, there are a few tech providers such as vested, cube etc.
I have a problem with these options i.e. safety of assets. These are brokers who can pledge your shares and run away. I don’t like that.
The right arrangement would be funds sitting in a custody account and broker only facilitating a trade. This is a good solution but comes at a decent cost. FPI, Ultra HNIs etc. use this option.
2. S&P 500 ETF
LRS and TCS apply if you were to invest in foreign ETFs directly. To do this, you still need to open broking account and the safety concern persists.
In March 2020, Motilal Oswal launched S&P500 ETF in India. This can be evaluated but daily liquidity would be quite thin. The other option is NASDAQ100 ETF by Motilal Oswal that has better liquidity but the ETF is Tech heavy. To invest in these ETFs, you need to have a demat in India.
These are treated as non-domestic equities and you are taxed as per your income tax bracket. You do not enjoy long term capital gain of 10%, which is available to only domestic equities.
3. Mutual Funds
There are a few options in India to invest in Indian mutual funds that are investing in a foreign market. Often these funds operate in a fund of funds structure, may have a higher expense ratio but a simpler option to have exposure in global equities.
These are also treated as non-domestic equities and you are taxed as per your income tax bracket. You do not enjoy long term capital gain of 10%, which is available to only domestic equities.
Investing is all about having an edge. If you can’t have an edge you should just be with the market. If you think you have an edge in a particular sector, you can evaluate to invest in individual global stocks else invest in mutual funds/ETFs.
Most of my investors are professionals/CXOs, often I have worked with them in my past life. Based on my experience, unless your investment portfolio is more than $1 million, I suggest evaluating options that are simple and yet provide you with exposure to global equities.
PPFAS Long Term Equity Fund is another great option. They invest 65% in domestic equities and 35% in global equities. So, you get an advantage of domestic equities capital gain tax and yet have global equities exposure.
The recent circular by SEBI requires multi-cap funds to invest 25% each in large, mid and small-cap. This might impact the allocation by PPFAS Long Term Equity Fund, however, the impact may not be fundamental.
If you are new to all these options, I would recommend PPFAS Long Term Equity Fund investment to begin with. Once you mature as an investor, you can have direct exposure in S&P500 via some fund house in India or outside India.
There is a lot of money riding on big tech companies, the current investment approach should be more staggered than in one go. Wear investing hat and you will know how the pendulum moves from pessimism to optimism and then back.