Diversify to Minimize Portfolio Risk

With both the global and the Indian economy set to slow down, Indian investors should take exposure to international equity funds and gold

- Sudipta Mitu

The Indian economy is currently in the doldrums. The GDP growth number for the first quarter of 2019-20 slumped to 5 per cent, the lowest in over six years. The State Bank of India released a report it may grow by only 4.2 per cent in the second quarter. One step investor can take to reduce portfolio risk, if they have not done so already, is to diversify into asset classes like international equities and gold.

International equities

When it comes to investing in international equities, most experts suggest investing in US-focused equity funds first. These funds have given an average return of 19.33 per cent over the past year (November 21, 2019 data). At this point, investors may raise the objection that the US economy too is slowing down, so what sense would it make to invest in the US markets at this point of time? The reason Indian investors are advised to invest in US equities is that it is a developed market while India belongs to the emerging market basket. The US market has positive but low correlation with the Indian market. In the context of a falling market, this would mean that even though the US markets may also fall when the Indian markets are falling, they may not fall at the same rate.

Traditionally, Indian investors have always had a massive home bias. When the Indian markets are doing well, they see no reason to invest internationally. But international diversification proves useful when there is a downturn in the Indian market, as it helps reduce portfolio volatility. Remember that no one market does well every calendar year. In some years, the US market will do well and in some the Indian market will do well. By investing in foreign markets, you will be able to reduce the risk that arises from being exposed to a single geography.