Devising a global equity portfolio for the Indian investor

Abstract

RBI has recently allowed Indian investors to invest abroad. This project examines the potential benefits and risks of investing abroad. There are several reasons why the Indian equity investor should go global. Firstly, Indian stock market is relatively small compared to the world market. Thus a local investor cannot benefit from investments in other markets. Secondly, a global portfolio reduces country specific risk and is less volatile. This study uses index investment strategy. Since exchange rate fluctuations can enhance or diminish the returns earned by an Indian investor, this study calculates returns in INR, which is the base currency and the returns are adjusted for foreign exchange risk. Excel solver was used to construct the optimal portfolio. Sharpe ratio has been used to evaluate the risk-return characteristics of various portfolios and select the most optimal portfolio. The portfolios have been back-tested for 5 and 10 year periods. This project finds that are that for a given level of expected return, a global portfolio is less volatile than the Sensex and that there is low correlation between Sensex returns and non-Indian indices even when adjusted for currency risk. Hence it is strongly recommended that Indian investors invest abroad.