Personal Finance

Should you go native on your investments?

B Venkatesh | Updated on April 08, 2018 Published on April 08, 2018

This depends on your life goal and personal circumstances

Do you have investments only in your home country? Or have you also invested abroad? In this article, we discuss the role of native portfolio in achieving your life goals. We also show when an alien portfolio would be useful. Our discussion is based on the core-satellite portfolio framework.

Native vs alien

A portfolio that is fully invested in the domestic or home market is called a native portfolio. A portfolio fully invested in foreign assets is called an alien portfolio. If you live in India and have invested in Indian stocks and bonds, you have a native portfolio. Living in India, if you invest in US stocks and bonds, you have an alien portfolio. In the core-satellite framework, the core portfolio is created to achieve your life goals such as meeting your child’s college education or accumulating money for your retirement.

How should you decide if your core portfolio be native or alien? The answer depends on your life goals and personal circumstances. In which country are you planning to retire? Are you likely to send your child abroad for her college education?

Consider your retirement. Suppose you are working in the US but want to retire in India, you should create an alien portfolio. That is, even though you are now earning US dollars, your investment should be in India in the domestic currency. Why?

If you decide to retire in India, your investment portfolio should be able to fund your post-retirement expenses. That means you need Indian currency. You could choose to invest in US dollar assets during your working life and convert the entire amount into Indian currency when you come to India. But that could expose you to high currency risk. What if US dollar depreciates against the rupee at that point in time? You should instead invest every month through your working life in the Indian market. That is, you should create alien assets. If you live in India and plan to retire in India, you should create a native portfolio. The above discussion can be translated into a simple rule: Your investment during the time horizon for a life goal should be in the currency in which you will spend the accumulated wealth to meet the intended goal. That is why you should create an alien portfolio if you wish to send your child abroad for her college education.

But it is better to avoid having both native and foreign assets within the same portfolio. Why invest in rupees when you need, say, US dollars to eventually meet your goal? You are creating an alien portfolio to meet your goal, not to diversify your investment risk. So, why invest in both native and alien assets?

Native to alien

You may be sometimes forced to convert your native portfolio into an alien portfolio. Consider this. You may have created a native portfolio to fund your daughter’s college education in your home country. But your daughter may decide in her final year of school to study abroad.

What should you do?

You should convert your native portfolio into an alien portfolio in instalments each year through her college programme. This will help you moderate your currency risk.

If you may fall short in your funding requirement, you can borrow in native currency to fund the gap. Or you can create an alien portfolio during your child’s first year of college. This will enable you to accumulate wealth to pay for the final year college fees.

Whether you create a native or an alien portfolio, you should set-up systematic investments in equity mutual funds.

The writer is the founder of Navera Consulting. Send your queries to portfolioideas@thehindu.co.in

Published on April 08, 2018

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