Waiting to invest? Why experts say global diversification is key in volatile markets

With geopolitical tensions rising, crude oil prices volatile, and Indian markets correcting from recent highs, many investors are postponing fresh equity investments, hoping to enter at lower valuations. But market experts warn that waiting for the “perfect time” often leads to missed opportunities, as stock markets are driven more by earnings growth, liquidity, and global capital flows than by short-term uncertainty.

Recent market moves have also exposed a gap in many portfolios — heavy dependence on a single market. As global assets such as US equities and gold outperformed Indian stocks over the past year, interest in international investing has increased among Indian investors.

In an interaction with Subho Moulik, Founder & CEO, Appreciate, we discussed why global diversification is gaining importance and how investors should approach international allocation.

Q1. Until recently, most Indian investors focused on domestic markets. What is driving the growing interest in international investing now?

Many investors are hesitant to invest in equities due to geopolitical tensions or concerns about valuations, but markets are driven primarily by earnings, liquidity, and interest rates rather than short-term events. Data shows Indian valuations are near long-term averages, suggesting markets are not as expensive as perceived.

Interest in international investing has increased due to three factors — performance differences, currency movement, and concentration risk. In 2025, the S&P 500 returned about 17.9% in dollar terms compared to roughly 10.5% for the Nifty. With the rupee weakening about 5% against the dollar, Indian investors holding US assets earned over 20% in rupee terms. Visible return gaps tend to change investor behaviour.

Recent market corrections also showed that holding multiple Indian funds does not always provide true diversification, because all funds remain linked to the same economy and currency. Overseas remittances under the Liberalised Remittance Scheme (LRS) have risen sharply, reflecting growing participation in global markets.

Q2. Many experts say the main benefit of global funds is diversification rather than higher returns. How should investors understand this?

The idea that diversification reduces returns is not supported by data. Over the last decade, the Nifty 500 has delivered about 13–15% annualised returns in rupee terms, while the S&P 500 has delivered around 18–19% in rupee terms. Investors who added US exposure did not sacrifice returns — they improved them.

There is also a mathematical benefit. When two markets have low correlation, combining them reduces overall volatility and improves long-term compounding. The correlation between Indian and US equities is relatively low, so a portfolio that includes both tends to grow more efficiently over time.

Another advantage is access to sectors not available in India, such as semiconductors, AI infrastructure, aerospace, and large biotech companies. Global exposure allows investors to participate in industries driving global growth.

Q3. How does international exposure reduce risk for investors who already hold multiple Indian equity funds?

Many investors believe that holding several domestic funds provides diversification, but most Indian equity funds have overlapping holdings and remain exposed to the same economy and currency. Market-cap diversification within India is useful, but it is not the same as geographic diversification.

Because Indian and US markets do not move together consistently, adding international exposure can reduce portfolio volatility without lowering expected returns. Recent geopolitical events showed this clearly — when Indian markets fell sharply, some US defence and energy stocks rose, helping offset losses for globally diversified investors.

International exposure also opens industries that do not exist at scale in India, such as semiconductor manufacturing and global defence companies, further reducing concentration risk.

Q4. How does the rupee–dollar movement affect returns in international funds?

Currency movement is often seen as a risk, but for Indian investors it has historically been a return booster. The rupee has depreciated steadily over time, which means dollar-denominated investments gain additional returns when converted back to rupees.

In recent years, the rupee has weakened due to factors such as oil imports and trade deficits. When oil prices rise, the current account deficit widens, the rupee weakens, and Indian equities can face pressure. In such periods, global investments can act as a hedge because dollar assets often rise in rupee terms.

So currency movement is not just risk — it is also a source of diversification and return.

Q5. What is the ideal allocation to international funds in a long-term portfolio?

There is no single allocation for everyone, but for most Indian investors with a serious long-term portfolio, 20–35% in international markets is reasonable.

For early-stage investors, even 20% exposure is meaningful. For mid-career investors with larger portfolios, 25–30% makes sense. For mature portfolios, 30–35% reflects true diversification.

Over the past decade, global exposure has added both return premium and currency benefit, while reducing volatility. India remains a strong long-term story, but it represents only a small share of global market capitalisation. A portfolio invested only in India is not fully diversified.