How much of your portfolio should be in international equities?
International investment has become a common phenomenon among investors globally. With the globalization of financial markets in recent years, international investment has become much easier. But, the question that arises here is how much of your portfolio should you invest in international equities.
Investing in international equities is a good move that can help people protect their portfolio from inflation and exchange rate risks. It can also help parents who are planning to send their children to study abroad build an education fund that covers all the expenses.
While there is no specific formula for determining how much of your portfolio should be invested in international equities, there are some sound investment principles to consider.
1. Diversification is Key
Diversification is a critical aspect of investing in international equities. It is crucial to spread your investment across different regions and sectors. By doing so, you can reduce the risk of losing your entire portfolio in case of a market crash in a specific region or sector.
For instance, if you are investing in emerging markets, you should spread your investment across different sectors such as technology, healthcare, finance, and so on. It is advisable to maintain a diversified portfolio to manage your risk effectively.
2. Analyze Your Risk Tolerance
Your risk tolerance is a critical factor that determines the proportion of your portfolio allocated to international equities. Generally, risk-averse investors prefer to keep a smaller portion of their portfolio in international equities, while risk-takers may consider investing more in international equities.
3. Consider Your Investment Goals
Your investment goals, such as retirement, education fund, or wealth accumulation, are crucial in determining the percentage of your portfolio allocated to international equities. For example, if your goal is to build an education fund for your child studying abroad, you may want to invest more in international equities to mitigate inflation and currency risks.
According to experts, allocating around 20-30% of your portfolio to international equities is a good starting point for most investors. However, the percentage depends on your risk tolerance, diversification, and investment goals.
4. Keep an Eye on Currency Risks
Currency risk is one of the most significant risks associated with international investment. Exchange rates are volatile, and currency fluctuations can significantly impact your investment returns.
To mitigate currency risks, investors can consider using currency hedging strategies. For example, investors can use currency futures, options, or swap contracts to hedge their positions against currency fluctuations. However, currency hedging can increase investment costs and may not be suitable for all investors.
5. Keep an Eye on Tax Implications
International investment can also have tax implications. Investors must be aware of the tax laws in their country of residence.
For example, in India, dividends received from international investments are subject to tax, and investors are required to disclose their foreign income in their tax returns. Investors should seek professional advice on the tax implications of international investment.
International investment can be an excellent strategy to diversify your portfolio and mitigate inflation and currency risks. However, it is crucial to analyze your risk tolerance, investment goals, and diversification strategies before investing in international equities. A well-diversified portfolio across different regions and sectors can help you manage your risk effectively. Finally, investors should keep an eye on currency risks and tax implications before investing in international equities.