Exploring ways to balance your dollar Expenses

–“Inflation is when you pay fifteen dollars for the ten-dollar haircut you used to get for five dollars when you had hair” – Mr Rao (one of our clients) quoted Sam Ewing. He surely has enough hair today as well but he was referring to the cost of education in one of the ivy leagues schools where he went for his Undergrad & Masters a couple of decades back. Now his son has also zeroed in on the same. According to Forbes, the cost of attending a 4-year college in the US has gone up by a whopping 497% between 1985-2018. For Mr Rao, the concern was not about his ability to afford but manage the cash flow requirements for a few other foreign currency commitments, coupled with his son’s education expenses over the next 4-5 years.

For affluent families, this is a peculiar situation today. They want the best education for their young, the best healthcare treatment for the family if the need arises and want to own luxurious properties internationally as passion investing. However, all these are prone to higher-than-normal inflation as well. Finaid.org indicates that the average cost of tuition tends to go up by an average of 8% every year. Healthcare costs are anyways spiralling up. One client who last year could not complete buy transaction of property in Enfield (London), was astonished to see that the price has gone up from GBP 600K to almost GBP 700K this year.

India is a fast-growing economy that has thrown opportunities of creating wealth in INR for astute individuals. Due to higher growth, the inflation in India also tends to be higher compared to the USA which makes INR depreciate over the medium term against the USD. On average, INR has depreciated by approximately 4% annually against USD and the trend is likely to continue for the next few years. Empirical evidence suggests this depreciation is not linear but it occurs in sudden spurts every 2-3 years so it’s very difficult to time the USD outflows.

Socrates became probably the first Global Citizen of the world when he said “I am not a citizen of Athens, or Greece, but of the World” but he didn’t have the challenges of today’s Global Citizen of India. They are someone who is either a PE Fund Manager or a VC or a CXO with a Global company or a business owner. In our observations, they predominantly have INR Investments but have significant expenses & commitments in foreign currencies too. Like everything else, there has to be a balance between USD assets & liabilities, and that balance can’t be achieved someday, it has to be a planned & thoughtful effort to be met by assets that cover aspects of growth, liquidity and currency appreciation of USD.

While the Indian economy has come a long way to offer many new-age investment opportunities in Sunrise sectors, still a lot of niche, cutting edge businesses of significant scale are not present as investment themes in India. Be it Semiconductor / Chips (Nvidia), Thermo Fischer (Life science solutions), rapidly growing Space technology (SpaceX), and many more. Also, there are many examples where businesses are listed on American exchanges, but they are truly global, as a majority of their business comes from geographies other than the USA. Apple for that matter has 48.5% of its revenue coming from the rest of the world in the last quarter. Another extreme is the new age tech businesses from India which are getting listed in the USA. Freshworks is a great case study in that. This Saas company from India which started in 2010, provides CRM solutions to more than 50K businesses and has a market cap of more than USD 5Bn. The number of new-age Indian businesses getting listed on International bourses will only go up from here. All this makes a strong argument in favour of investing internationally.

Having established the paramount need for global investments in the portfolio, let’s look at the ways of how one can build global exposure:

Investment through LRS Route: RBI allows to remit up to USD 250K per person/per financial year overseas which include Investments abroad, Medical treatment, International travel and any other dollar purchase. Even your Apple Music subscription or in-app purchases are counted in your LRS limits. For an affluent family, there is a vast sea of international opportunities to invest in not only Mutual Funds, Real Estate, Hedge Funds & Private Investments but also in art & NFTs too. An Investor with such investing landscape s likely to have other international expenses too, the investments by using these LRS limits is likely to be insufficient from the point of relevant diversification as meeting the expenditure for global expenses.

Investments beyond LRS: Indian Mutual Funds come as a Saviour as they enable investing in international markets beyond LRS limit. These funds offer the opportunity to participate in international markets when markets are looking attractive and the LRS limit may not be sufficient to have an exposure that is commensurate to the portfolio. These funds are a good vehicle to balance out global expenses in future. S&P500 Index offers diversification an international index can offer. The Index reflects more than 80% of the US market cap, also almost 30% of revenues for these companies come from their Non-US operations or geographies. The Index has significant weightage to sectors like Technology Hardware, Peripherals, Semiconductor, Healthcare equipment & services which are not present in Indian Indices and hence add a different dimension to the portfolio. The S&P500 Index has delivered Appx 10% average returns over last 30 years. Nasdaq 100 is another index that provides diversification by adding technology and technology enabled companies, which make up this index . Coupled with passive management at low expense, passive funds replicating S&P500 become a good choice. AMCs including the likes of Motilal, Mirae & Kotak now have international passive funds. In fact, Motilal Oswal AMC has been ahead of the curve in introducing several International Index Equity funds to Indian investors.

While referring to “Guide to the Markets”, the data validates that winner amongst different classes keeps on changing, so it becomes far more pertinent to have Asset allocation funds in the portfolio which astutely have built 2 distinct features of exposure of 10%-20% to International Equities and a periodic / factor-based rebalancing. In the current environment of volatile financial markets due to expected action by the US Fed on the interest rate, ongoing Geopolitical issue, rising Oil prices and some possible earnings disappointments, a portfolio having exposure to such Asset Allocation Funds will be better-positioned. The key thing to investing success is less about which stock you own or which piece of real estate you buy. It is more about the asset allocation your portfolio has. These Asset Allocation funds tick all the boxes in that context.