Diversify your overseas investments – The Hindu

Investment portfolios are subject to legislative risks because the government. can make sudden changes

Investment portfolios are subject to legislative risks because the government. can make sudden changes

The government can change rules and regulations or even introduce new laws. Some of them might come at an unexpected time. When these laws or rules come into force, it is possible that our investment strategy and our existing portfolio will be impacted.

Some of these key measures that have impacted our financial, investing and wealth creation habits include demonetization, extending the duration of long-term investments for debt funds from one year to three years , and the abolition of wealth tax, inheritance tax, land cap law and gold. Law of control.

Friend’s daughter had to have it Arangetram (first performance of Bharatanatyam) a few days after the demonetization announcement. As some of the musicians had insisted on cash payments, my friend and his family had to spend hours outside banks and ATMs to find cash for payments.

Time and time again we have witnessed such legislation. In all of these situations, the damage or benefit to our wallet has been sudden.

Sometimes there is a direct impact of such legislation on our investment portfolios and sometimes it is indirect. For example, when the government decided to offer textile factory land for construction purposes, the real estate market underwent a change.

Although this is a direct benefit, the indirect benefit is that a whole new business district has been created, jobs have been created and several other industries have received benefits.

On the other hand, when the capital gains structure of debt-based mutual funds was changed, debt-based mutual funds took a hit, while bank term deposits (FDs) took advantage of it.

Until a few years ago, we Indians could not afford to deal with legislative risks, as these have often been sudden moves. Moreover, as investors, we had no say in the developments. However, with the introduction of the Liberalized Remittance Scheme (LRS) in 2004, the situation changed. Under current arrangements, a resident Indian can invest up to $250,000 per year outside India. With the exception of a few countries, funds can be invested in most parts of the world.

The investment could be in any program regulated by the local government. However, this is also subject to change. And, for a transitional period, this limit has been modified.

More often than not, when we advise our clients to take advantage of the programs and invest a small portion outside the country, their feedback is, “We get the best returns in India, so why should we invest outside India?”

Always remember that risk and returns are two sides of the same coin. Every time we see good returns, there are also risks associated with that. When we invest only in India, all our eggs are in one basket. Look at your portfolio – stocks, debt, gold, real estate and other forms of investments are only in India and in one currency (INR). Any legislative changes will have an impact on all these investments and we will have no control over them. It is important to diversify investments to reduce portfolio risk.

Now in India we also have mutual fund schemes which invest the corpus outside the country. These schemes could also be considered to mitigate risk.

Never make an investment that promises “super normal returns” by taking advantage of loopholes in existing regulations, as the government may continue to fill them.

To avoid legislative risks, diversify your investments between countries and avoid making money through loopholes in the system. Legislative risk is a systemic risk and cannot be avoided. Investors can only take steps to reduce risk.

(The author is a financial planner and author of Yogic Wealth.)

About Kristina McManus

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