What is global investment?
Global investment is a strategy to obtain financial assets from different countries of the world. It is the process of spreading investment capital between a mix of financial instruments and firms. Its objective is the diversification of the portfolio and distribution of risk among different markets. However, as the portfolio is diversified, the risk gets lower. Thus, leading to an increase in the value of one portfolio asset with a decrease in another.
Investors have used this strategy for years to manage the risk associated with investing. Consequently, it has been providing an opportunity to increase wealth and manage risk. And allowing firms to increase productivity and employment opportunities. However, it is the opposite of domestic investment, where the agent requires all the financial instruments from his own country. Thus, it should consider the pure political variable. These may fall into a tax loophole that reduces the rate of taxation on investment income.
Benefits of global investing
- Diversification– A diversified portfolio acts as a source of stability during market volatility. Diversification is the most crucial benefit of global investing. It gives investors options in terms of economic fluctuations. Thus, by investing internationally, your finances will have alternative sources of stability.
- Options in Investment– Global investing enables access to investment opportunities, not present domestically. The most popular forms of international investments: Mutual Funds, Exchange-Traded Funds, and American Depositary Receipts.
- Protection of Investment – Global investment protects investments against fraud and liquidation. Thus, developed market companies have strong regulations. These ensure sound corporate governance and penalty for market abuse.
- Reduction in Taxes- Taxation on investment income is a complex issue. It has a huge impact on the profitability of investing. However, global investment reduces the rate of taxation on income from these investments.
Risks of Global Investment
Global investment risk is a broad term. It encompasses many different types of international risk factors. These risks are as follows:
- Currency Risk– This risk associates itself with fluctuation in foreign currency.
- Political Risk– This risk associates itself with foreign Government and politics. It also sometimes refers to the ability of a country to maintain a hospitable climate for outside investment.
- Interest Rate Risk– This risk consists of unfavorable changes to monetary policy.
How much Global exposure?
The decision to invest globally is the first step. The next step is to determine an appropriate allocation. Let’s take a look at approaches for global allocation and allocation within a specific country or market.
The standard financial theory approach for both allocations is to invest proportionally according to market capitalization. This method assumes markets to be reasonably efficient. In addition, it supposes that stock prices reflect all the available information, investment positions, and expectation of the investing community.
Another factor for determining how much to allocate outside domestic equity markets is diversification. Thus, to evaluate the expected diversification benefits of international equities, analyze the impact of incremental allocations of international equities on portfolio volatility upon adding to a domestic equity portfolio.
A combination of imperfectly correlated returns across countries and lower global market volatility means that investors in each market examined will likely realize diversification benefits from incremental allocation to International stocks. In each market, the marginal benefit to International diversification declines as allocation to International equities increase.
Global funds v/s International funds
The words “Global” and “International” tend to be used interchangeably. However, in the investing world, both these funds have completely different investment goals. Thus, providing investors with different kinds of investing opportunities.
Global funds consist of securities in all parts of the world. These are chosen primarily by investors wishing to diversify against country-specific risk. Such investors may already have a lower than desired concentration of domestic investment. Or may not want to take on the higher level of sovereign risk involved in making a foreign investment.
International funds consist of securities from all countries except the investor’s home country. These funds provide diversification outside the investor’s domestic investment. If an investor currently holds a portfolio consisting mainly of domestic investment, he or she may choose to diversify against country-specific risk and purchase an international fund. Alternatively, a spectacular may invest in this fund because he or she anticipates a rise in a particular foreign market. These funds can invest in solid markets of developed countries. Or they might invest in emerging markets, which are less mature and carry more risk.
It refers to the investments that are made outside the domestic markets and offers portfolio diversification and opportunity for risk minimization. An investor can make international investments. Thereby, broadening his portfolio and expanding his horizon of returns.
Types of international investments:
- Government Funds: These funds flow from one economy to another. Consequently, these aid or assist the economy as a whole. Thus, carried out between the governments.
- Cross Border Loans: It is a loan arrangement where government or institution seeks a loan for financing from a foreign bank. It became a lot popular due to its easier accessibility and a few collateral restrictions.
- Foreign Portfolio Investment– It refers to when investors express investment interest in foreign companies. However, these investors may not have long-term interests necessarily. Hence, they can easily be traded through exchanges.
- Foreign Direct Investment– FDI is made by foreign multinational companies in an economy. It is more of a long-term concern. Also, it takes any form of investing, from equities and steps to properties and assets.
Hence, domestic investors should consider allocating part of their portfolios to international equities. It will help in determining how much to allocate between domestic and international equities