Until quite recently, Indian investors have had good reason to ignore global equities: from 2003 to 2018, India delivered the best returns out of any of the world’s 40 largest stock markets.1 Further deterring their interest, access to international markets has not always been easy or cheap.
However, times are changing. During the COVID-19 pandemic, global markets found new champions in industries without close Indian equivalents, while Indian investors began showing interest in new, simpler routes to international diversification such as mutual funds and exchange-traded funds (ETFs).
By offering low-cost options to diversify, index-based investing has seen significant growth in other global markets, and 2020 brought India up to date with the first fund tracking the S&P 500®, which is perhaps the world’s most widely recognized equity benchmark. Soon, investors in India may be offered a range of options tracking indices for more global regions, global sectors, and even indices reflecting investment targets such as income, growth, or ethical investing.
Using the long histories of benchmarks and fund performance data published by S&P Dow Jones Indices (S&P DJI), this paper examines the arguments and opportunity set for index-based international diversification from an Indian perspective, with a focus on the practical impact of an allocation to global equities.
HOME BIAS IN INDIAN EQUITIES
We cannot know, down to the last Indian rupee or U.S. dollar, how much all Indian investors own in all international stocks. According to some academic estimates, the average allocation made to international equities by Indian investors is one of the lowest of any country, only a rounding error away from 0%2. Meanwhile, the distribution of AUM across the Indian mutual fund market supports the hypothesis that Indian investors have been almost exclusively domestically focused.