While global economic tension may reflect on the equity market, diversifying asset allocation with international equity has its own advantages for Indian retail investors. Given India is an emerging market, the equity market is volatile compared to the US market. Adding US equity brings stability to investment portfolios. And to measure volatility in indices, be it Nifty or S&P 500, market participants make use of the VIX.

VIX is a real-time volatility index that represents the market’s expectations for the relative strength of near-term price changes of the underlying index. Volatility, or the rate at which prices change, is frequently used to gauge market sentiment, particularly the level of fear among market participants. As a result of what is happening with the US economy, and the rate hike by the Federal Reserve, the global economies are being impacted. Bharat Phatak, Director, Scripbox shares an interesting take on the VIX being witnessed in the Indian and US stock markets and why, therefore, it makes sense to diversify abroad. Excerpts:

VIX is the volatility index that dictates changes in the level of fluctuations in the market. Indian VIX has a significant level of change against the US VIX. Below is a comparison between the Nifty 50 index and the S&P 500 index.

For the period the change in Nifty 50 is 13.40 points against S&P 500 moving only by 5.39 points. While these numbers are for a limited period, over the long term, the same replicates and prove beneficial for investors.

Based on the investment goals and risk profile, an investor should undertake to invest in global equity. The US equity market is stable and mature compared to the Indian market and also helps retail investors achieve inflation-beating returns if they have the patience to stay invested for the long term.

To include global equity, investors should first analyze the state of their existing portfolio. If it is already too equity-heavy, the weight should be reduced to add more stable investment instruments such as fixed income. This will open up an opportunity to include more equity in the form of international stocks and funds.

While for seasoned investors and HNIs, investing directly in US stock is possible, for average joe investors, investing in mutual funds having exposure to the US market makes more sense. Investing via global funds, ETFs, or funds of funds eliminates the constant need to monitor investment and reduces the requirement to learn and abide by foreign compliance and taxation for retail investors.

Based on the existing asset allocation, investors can decide to include foreign equities in their portfolio as a certain percentage to diversify their portfolio. This results in higher returns and lowers volatility at a time when the fate of the global economy is uncertain and reduces the concentration risk of investing in domestic equities. Also, these measures should be taken now rather than later.

While the first half of 2023 is likely to be challenging for investors given expected rate increases, the second half can land smoothly if inflation nears the targeted rate. Higher rates typically pause a threat of recessionary pressure, and given the anticipation of the same by experts, Indian investors should anchor their investments in accordance. The key lies in keeping a long-term view of investment goals and diversifying asset allocation to avoid short-term challenges impacting long-term returns.