Affluent Indian investors embrace global debt for diversification

India remains in the spotlight in the ever-changing world economy. While global equity investors increase their stakes in India, a paradigm shift is occurring among domestic investors. The focus is now on diversifying portfolios beyond borders, particularly concerning debt investments.

International investors are augmenting their commitments to India, a trend bolstered by the inclusion of Indian sovereign bonds in global indices. This development is expected to boost foreign investments in both government securities and corporate bonds. At the same time, more and more domestic investors want to protect their investments from ups and downs in the local markets and are looking to invest outside India to diversify their portfolios.

As global economic dynamics evolve, affluent Indians are looking to create a financial safety net by investing in international markets. This trend spans across family offices, corporate treasuries, ultra-high net-worth individuals (UHNIs), and young professionals.

Also read: India’s inclusion in global bond indices could bring $24 bn of inflows: Sonal Desai, CIO, Franklin Templeton Fixed Income

Family offices, for instance, are proactively constructing investment portfolios with securities denominated in USD. The objective is to financially prepare for future needs like education expenses of their children, setting up businesses, asset acquisition, and so on. This early-stage international investment strategy serves a dual purpose, mitigating the impact of inflation and shielding against currency depreciation.

The liberalised remittance scheme (LRS) facilitates this trend, allowing resident individuals to remit up to $2,50,000 per financial year for various capital account transactions, including investments in financial securities like bonds and shares. LRS also permits family members to pool their remittances, enabling a family of four to collectively remit up to $1 million per financial year. Corporate entities are allowed to allocate up to 50 percent of their last audited net worth in offshore markets.

The shift from traditional investments in equity and exchange traded funds (ETFs) to more sophisticated options like boutique investment funds and listed structured notes is indicative of a maturing investment landscape. Indian residents, being consumers of globally recognised tech and FMCG companies, are drawn to the rising stock prices of these companies and their expansive global reach. This, in turn, fuels the aspiration to be a part of their growth trajectory.

While global diversification for Indian investors has historically been synonymous with equity markets in the US or other major economies, a recent shift in sentiment is the attention towards fixed-income securities. In a landscape potentially marked by a global economic slowdown and a risk-off sentiment, investors are realising the appeal of international debt securities as a liquid and low-risk asset class. The sharp rise in global interest rates compared to domestic rates further enhances the attractiveness of dollar-denominated debt investments.

Macro trends also suggest that relative to the RBI, global central banks, especially the US, are poised for substantial rate cuts. This macroeconomic view is influencing domestic investors to include global debt within their overall portfolios.

Also read: Why consider investing abroad at all?

To meet the increasing demand for global debt, some domestic fund houses have introduced international debt offerings in a fund of funds (FoF) structure. However, investor response to such offerings has remained muted, due to mixed performance and dual fund management expenses. Considering this, investors prefer to seize the opportunity by exploring alternative options, like AIFs (alternative investment funds).

Noteworthy among these offerings are those originating from the Gujarat International Finance Tec-City (GIFT City), which provides transparency, regulatory compliance, low expense ratios for global investors, and tax efficiency for domestic investors. Additionally, some fund houses offer a ‘performance-based fee structure,’ charging only for the alpha—i.e., the incremental return generated over the average market return or the benchmark index—further enhancing the appeal of these global debt options.

As outbound investments by Indian residents gain momentum, investment solutions are evolving to incorporate specialisation, structure, and focus. In an era defined by economic uncertainty and market fluctuations, investors face the challenge of safeguarding their portfolios while optimising returns. The persistent depreciation and volatility of the INR against the USD necessitates a proactive response to keep the portfolio value competitive.

Diversification into USD-denominated financial assets has emerged as a strategic shield against currency risk. Investors can now participate in a curated portfolio of USD bonds to navigate the global financial landscape with better risk-adjusted returns. As the global equity environment remains volatile, participating in a well-structured portfolio of US bonds can provide investors with the resilience needed in these uncertain times.

Source: RBI, AMFI, Bloomberg, Alpha Alternatives Research

Disclaimer: Views and opinions expressed in this column belong to the author. Moneycontrol advises users to check with certified experts before taking any investment decisions.