Is 50% of Equities too much in Domestic Stocks (India)?

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Is 50% of Equities too much in Domestic Stocks (India)?

Post by Anon9001 »

I am psychologically comfortable with this weightage in that in I am only having this weightage because of my inability to forecast the future performance of either asset hence I own both in equal proportions. I feel this Global-Cap Weight is too extreme in that I am making a bet that the Domestic Market will not outperform ROW (even though there is no guarentee that it will not) due to how small of a exposure it is having (1%). While some might feel it is too much I would like to note that rest of Domestic Population have 95% of their Equities in Domestic Stocks so compared to my neighbours I am having much less home bias but I would still like to hear arguments on whether it is too much or too little.

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Re: Is 50% of Equities too much in Domestic Stocks (India)?

Post by KlangFool »

OP,

I am not comfortable investing in India stock market at all. A few families dominated the whole country/market.

This is the same reason why I would not invest in the South Korea stock market.

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Re: Is 50% of Equities too much in Domestic Stocks (India)?

Post by Anon9001 »

KlangFool wrote: Mon Feb 27, 2023 1:15 pm OP,

I am not comfortable investing in India stock market at all. A few families dominated the whole country/market.

This is the same reason why I would not invest in the South Korea stock market.

KlangFool
Here is the weightage of Top 10 stocks in Nifty 50 Index. I am not sure what you mean by dominance. Reliance, TCS constitute only 14% of Nifty 50 weightage.

Reliance Industries Ltd. 10.41%
HDFC Bank Ltd. 9.06%
ICICI Bank Ltd. 7.44%
Infosys Ltd. 7.20%
Housing Development Finance Corporation 6.06%
Tata Consultancy Services Ltd. 4.41%
ITC Ltd. 3.98%
Larsen & Toubro Ltd. 3.29%
Kotak Mahindra Bank Ltd. 3.22%
Axis Bank Ltd. 3.02%
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Re: Is 50% of Equities too much in Domestic Stocks (India)?

Post by KlangFool »

Anon9001 wrote: Mon Feb 27, 2023 1:23 pm
KlangFool wrote: Mon Feb 27, 2023 1:15 pm OP,

I am not comfortable investing in India stock market at all. A few families dominated the whole country/market.

This is the same reason why I would not invest in the South Korea stock market.

KlangFool
Here is the weightage of Top 10 stocks in Nifty 50 Index. I am not sure what you mean by dominance. Reliance, TCS constitute only 14% of Nifty 50 weightage.

Reliance Industries Ltd. 10.41%
HDFC Bank Ltd. 9.06%
ICICI Bank Ltd. 7.44%
Infosys Ltd. 7.20%
Housing Development Finance Corporation 6.06%
Tata Consultancy Services Ltd. 4.41%
ITC Ltd. 3.98%
Larsen & Toubro Ltd. 3.29%
Kotak Mahindra Bank Ltd. 3.22%
Axis Bank Ltd. 3.02%
Take the Nifty 50 and group them by the controlling family.

For example, how many of them are in the Tata group?

To each its own. If you are comfortable with this, then, go ahead.

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Re: Is 50% of Equities too much in Domestic Stocks (India)?

Post by Valuethinker »

Anon9001 wrote: Mon Feb 27, 2023 1:12 pm I am psychologically comfortable with this weightage in that in I am only having this weightage because of my inability to forecast the future performance of either asset hence I own both in equal proportions. I feel this Global-Cap Weight is too extreme in that I am making a bet that the Domestic Market will not outperform ROW (even though there is no guarentee that it will not) due to how small of a exposure it is having (1%). While some might feel it is too much I would like to note that rest of Domestic Population have 95% of their Equities in Domestic Stocks so compared to my neighbours I am having much less home bias but I would still like to hear arguments on whether it is too much or too little.

Thanks,
Anon9001.
Too much, of course. You want maximum diversification.

It's one thing to have 10-20% in your home country, although that's a massive overweighting it probably won't affect your outcomes too much.

50%? You've thrown away a huge amount of diversification benefit.
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Re: Is 50% of Equities too much in Domestic Stocks (India)?

Post by Anon9001 »

Valuethinker wrote: Tue Feb 28, 2023 7:38 am Too much, of course. You want maximum diversification.

It's one thing to have 10-20% in your home country, although that's a massive overweighting it probably won't affect your outcomes too much.

50%? You've thrown away a huge amount of diversification benefit.
I am not sure exactly what you are saying here about losing huge amount of diversification benefit. The Standard Deviation of Annual Returns of 50 Sensex 50 MSCI USA INR Portfolio which is rebalanced every 5 years is 19.64% whereas the Standard Deviaton of Annual Returns of MSCI USA INR is 16.64%. For comparison the Standard Deviation of Sensex Annual Returns is 29.24%. This is for the time period from 1979-2022.This portfolio is basically just 18% "riskier" if Standard Deviation is reliable as a measure of risk.

Now I personally dont view Standard Deviation as particularly useful measure of risk as it tends to disregard sequence of returns risk and also it tends to punish upside fluctuations (i.e. large positive return) and downside fluctuations (large negative return) equally even though investor prefers the former over the later. There is a Ulcer Index and if I were to use this to measure risk then it states that Sensex is having Ulcer Index of 29.81%, 50 Sensex 50 USA is having Ulcer Index of 18.08% and MSCI USA is having Ulcer Index of 23.27%. This Ulcer Index is calculated on Monthly Returns of all these assets from 1979-2022 as the author of the index warns against using low frequency data like quarterly/annual as there is a danger of missing significant intra-period drawdown-and-recovery events by doing so. More info on Ulcer Index here.

Now you might wonder why I am using MSCI USA instead of MSCI ACWI right? Well they are basically the same at this stage. MSCI ACWI is 60% USA stocks and if US stocks goes into slumber like 2000-2010 then its highly unlikely MSCI ACWI will end up giving good returns due to this high weightage.

Regards,
Anon9001.
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Re: Is 50% of Equities too much in Domestic Stocks (India)?

Post by freakyfriday »

It seems you've made up your mind Anon9001, why are you asking? Is there a specific worry you have?
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Re: Is 50% of Equities too much in Domestic Stocks (India)?

Post by Anon9001 »

freakyfriday wrote: Tue Feb 28, 2023 8:18 am It seems you've made up your mind Anon9001, why are you asking? Is there a specific worry you have?
I am open to change as long as there is some data backing up why 50% Domestic Equities is particularly risky. I use data to support my arguements and one could argue actually this data I am using is actually over-estimating the risk of Indian Equities as I am calculating Standard Deviation on Annual Returns and Ulcer Index on Monthly Returns of these Assets from 1979-2022. In 1979 Indian Stock Market was not even Emerging Market it was more of a Frontier Market whereas now Indian Market is much larger and is the third largest EM market. Also I think there was no regulator at the start of this time period and if I am correct then it was much more of a casino early on as a result compared to now.
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Re: Is 50% of Equities too much in Domestic Stocks (India)?

Post by gatorking »

What are the non-domestic options you are considering and what are their expense ratios?
I haven't looked at India's mutual fund offerings in a few years but last I looked it was difficult to invest in "foreign" companies at low cost.
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Re: Is 50% of Equities too much in Domestic Stocks (India)?

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gatorking wrote: Tue Feb 28, 2023 8:28 am What are the non-domestic options you are considering and what are their expense ratios?
I haven't looked at India's mutual fund offerings in a few years but last I looked it was difficult to invest in "foreign" companies at low cost.
Things have changed a lot in past two years. Now there is a fund NAVI US Total Stock Market which is investing into Vanguard Total Market ETF. The total expense ratio of this fund including the underlying fund's expense ratio is 0.09%. If you were to consider witholding taxes of 25% that is applicable on US Dividends with a Dividend Yield of 1.68% the TER then comes out to 0.51% which is pretty cheap still. I invest 35% of my Equities into this fund and 65% into Parag Parikh Flexi-Cap Equity which is actively managed and is having tiny exposure of 15% to US stocks. Total US stock exposure is 50%.
Last edited by Anon9001 on Tue Feb 28, 2023 8:37 am, edited 1 time in total.
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Re: Is 50% of Equities too much in Domestic Stocks (India)?

Post by gatorking »

Anon9001 wrote: Tue Feb 28, 2023 8:34 am
gatorking wrote: Tue Feb 28, 2023 8:28 am What are the non-domestic options you are considering and what are their expense ratios?
I haven't looked at India's mutual fund offerings in a few years but last I looked it was difficult to invest in "foreign" companies at low cost.
Things have changed a lot in past two years. Now there is a fund NAVI US Total Stock Market which is investing into Vanguard Total Market ETF. The total expense ratio of this fund including the underlying fund's expense ratio is 0.09%. If you were to consider witholding taxes of 25% that is applicable on US Dividends with a Dividend Yield of 1.68% the TER then comes out to 0.51% which is pretty cheap still.
Thanks for this information. That is indeed welcome news. I think the main advantage of this fund for diversification is: "This investment can act as a potential hedge against the depreciation of INR vs USD." But only you can know if this is useful to you.
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Re: Is 50% of Equities too much in Domestic Stocks (India)?

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gatorking wrote: Tue Feb 28, 2023 8:36 am Thanks for this information. That is indeed welcome news. I think the main advantage of this fund for diversification is: "This investment can act as a potential hedge against the depreciation of INR vs USD." But only you can know if this is useful to you.
I believe this is useful for traded goods. They tend to get higher in price if INR depreciates against USD. I believe non-traded goods dont get effected by this.
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Re: Is 50% of Equities too much in Domestic Stocks (India)?

Post by rr2 »

Anon9001 wrote: Tue Feb 28, 2023 8:23 am
freakyfriday wrote: Tue Feb 28, 2023 8:18 am It seems you've made up your mind Anon9001, why are you asking? Is there a specific worry you have?
I am open to change as long as there is some data backing up why 50% Domestic Equities is particularly risky. I use data to support my arguements and one could argue actually this data I am using is actually over-estimating the risk of Indian Equities as I am calculating Standard Deviation on Annual Returns and Ulcer Index on Monthly Returns of these Assets from 1979-2022. In 1979 Indian Stock Market was not even Emerging Market it was more of a Frontier Market whereas now Indian Market is much larger and is the third largest EM market. Also I think there was no regulator at the start of this time period and if I am correct then it was much more of a casino early on as a result compared to now.
You seem to be doing the research. Go ahead and work through all of the pros and cons objectively instead of looking at how much your neighbors have or don't have. That is immaterial to your decision.

If there were a large collapse of the Indian market (say due to financial shenanigans/govt actions), would you still be ok? That risk may be getting smaller but it still exists.

And after all of the recent news, it is not clear how much of the stock shares are actually available publicly. It seems a significant fraction of the shares (> 50%) are family owned/controlled. The Indian Govt is showing signs of maturity and not getting involved directly in this mess and letting the market sort it out. That is a good sign.
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Re: Is 50% of Equities too much in Domestic Stocks (India)?

Post by rr2 »

Oh and I just saw your sig. Given the relatively tiny fraction that equities compose, it probably doesn't matter what allocation you have domestic/total world.
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Re: Is 50% of Equities too much in Domestic Stocks (India)?

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rr2 wrote: Tue Feb 28, 2023 8:59 am You seem to be doing the research. Go ahead and work through all of the pros and cons objectively instead of looking at how much your neighbors have or don't have. That is immaterial to your decision.

If there were a large collapse of the Indian market (say due to financial shenanigans/govt actions), would you still be ok? That risk may be getting smaller but it still exists.

And after all of the recent news, it is not clear how much of the stock shares are actually available publicly. It seems a significant fraction of the shares (> 50%) are family owned/controlled. The Indian Govt is showing signs of maturity and not getting involved directly in this mess and letting the market sort it out. That is a good sign.
Large Collapse risk is why I own International stocks in a 50% weightage. If Domestic market collapses by 90% and International market is just doing nothing and staying stable then it is a 45% loss. Considering in this board we are trained to expect 50% loss from Equities this is fine to me.
rr2 wrote: Tue Feb 28, 2023 9:00 am Oh and I just saw your sig. Given the relatively tiny fraction that equities compose, it probably doesn't matter what allocation you have domestic/total world.
That is a temp allocation though. I am going to get rid of these (or at least most of it) in future(10-20 years) when I get ownership of this and put the cash in Equities. Right now Father is having ownership and is not likely to sell it but still I do keep this in mind even though its a future money/asset hence the sig.
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Re: Is 50% of Equities too much in Domestic Stocks (India)?

Post by rr2 »

Anon9001 wrote: Tue Feb 28, 2023 9:08 am Large Collapse risk is why I own International stocks in a 50% weightage. If Domestic market collapses by 90% and International market is just doing nothing and staying stable then it is a 45% loss. Considering in this board we are trained to expect 50% loss from Equities this is fine to me.
It is possible that a complete Indian domestic collapse may be accompanied by a 50% World equities collapse. If so, your portfolio will be down by 7570%. Is that acceptable?
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Re: Is 50% of Equities too much in Domestic Stocks (India)?

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rr2 wrote: Tue Feb 28, 2023 9:21 am It is possible that a complete Indian domestic collapse may be accompanied by a 50% World equities collapse. If so, your portfolio will be down by 75%. Is that acceptable?
Hmm what you are saying is quite interesting. I am not sure how that would take place and due to me evaluating this a theoretical possibility I will probably be quite calm and state yes I would deal with now but IRL if that were to occur I would probably panic. I think though these events are quite rare no? Last example of country market going down significantly was Russian market which went down 90% in 2022 (For a local investor. It was 100% loss for foreigner)and I believe the World markets didn't decline that much in that year.
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Re: Is 50% of Equities too much in Domestic Stocks (India)?

Post by MarkRoulo »

Anon9001 wrote: Mon Feb 27, 2023 1:12 pm I am psychologically comfortable with this weightage in that in I am only having this weightage because of my inability to forecast the future performance of either asset hence I own both in equal proportions. I feel this Global-Cap Weight is too extreme in that I am making a bet that the Domestic Market will not outperform ROW (even though there is no guarentee that it will not) due to how small of a exposure it is having (1%). While some might feel it is too much I would like to note that rest of Domestic Population have 95% of their Equities in Domestic Stocks so compared to my neighbours I am having much less home bias but I would still like to hear arguments on whether it is too much or too little.

Thanks,
Anon9001.
India's GDP is roughly the same size as that of France's or the United Kingdom's.

A "check" on your thinking is to ask yourself if you would be comfortable with 50% of your equity exposure being domestic if you were a French person living in France or a British person living in the UK. Or, presumably, an Indian person who expected to live and retire in either of these two countries.

As has already been pointed out, however, with only 8% of your investment assets in equities it really doesn't matter :-)
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Re: Is 50% of Equities too much in Domestic Stocks (India)?

Post by rr2 »

Anon9001 wrote: Tue Feb 28, 2023 9:29 am Hmm what you are saying is quite interesting. I am not sure how that would take place and due to me evaluating this a theoretical possibility I will probably be quite calm and state yes I would deal with now but IRL if that were to occur I would probably panic. I think though these events are quite rare no? Last example of country market going down significantly was Russian market which went down 90% in 2022 (For a local investor. It was 100% loss for foreigner)and I believe the World markets didn't decline that much in that year.
This is just me, but I would be inclined to treat the Indian Market as the play money portion and maybe have not more than 10%. The rest would go into a global portfolio. Again, this is just me.
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Re: Is 50% of Equities too much in Domestic Stocks (India)?

Post by Anon9001 »

MarkRoulo wrote: Tue Feb 28, 2023 9:35 am India's GDP is roughly the same size as that of France's or the United Kingdom's.

A "check" on your thinking is to ask yourself if you would be comfortable with 50% of your equity exposure being domestic if you were a French person living in France or a British person living in the UK. Or, presumably, an Indian person who expected to live and retire in either of these two countries.
On a risk of the topic going off-course I would still like to correct that's a nominal GDP. Now I know its quite common to use this as if it is not having flaws but it is having flaws in that it is using market exchange rate for converting GDP in local currency to USD when GDP of a country is "Total Value of Non-Traded and Traded Goods/Services in a Country in a given Year". Using a market-exchange rate for non-traded goods tends to under-estimate their value for developing countries. For instance a Big Mac in US is 5.15 USD whereas in India its 2.39 USD. Now its not exactly similar due to the fact that there is no Beef in the "Big Mac" in India but still it indicates that using a market exchange rate is not valid for non-traded goods.

Due to this If you are using nominal GDP you will actually overestimate GDP of countries which are expensive to live in and underestimate GDP of countries which are cheap to live in.

Hence the valid thing to look at is GDP PPP and if you look there India is 3rd Largest Economy in the World behind just USA and China. Now France/UK instead of being same size as Indian Economy is now 32% of India's GDP.

Regards,
Anon9001.
Last edited by Anon9001 on Tue Feb 28, 2023 10:09 am, edited 1 time in total.
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Re: Is 50% of Equities too much in Domestic Stocks (India)?

Post by KlangFool »

MarkRoulo wrote: Tue Feb 28, 2023 9:35 am
Anon9001 wrote: Mon Feb 27, 2023 1:12 pm I am psychologically comfortable with this weightage in that in I am only having this weightage because of my inability to forecast the future performance of either asset hence I own both in equal proportions. I feel this Global-Cap Weight is too extreme in that I am making a bet that the Domestic Market will not outperform ROW (even though there is no guarentee that it will not) due to how small of a exposure it is having (1%). While some might feel it is too much I would like to note that rest of Domestic Population have 95% of their Equities in Domestic Stocks so compared to my neighbours I am having much less home bias but I would still like to hear arguments on whether it is too much or too little.

Thanks,
Anon9001.
India's GDP is roughly the same size as that of France's or the United Kingdom's.
MarkRoulo,

That statement is only useful if most of the India's GDP is by public listed companies. I do not know whether that is true for India. But, for many Asian countries, that statement is not true.

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Re: Is 50% of Equities too much in Domestic Stocks (India)?

Post by Anon9001 »

rr2 wrote: Tue Feb 28, 2023 9:41 am This is just me, but I would be inclined to treat the Indian Market as the play money portion and maybe have not more than 10%. The rest would go into a global portfolio. Again, this is just me.
I will not pretend that this is not a function of Familiarity Bias and anyone outside here might look at it funny but everyone is having home bias. In fact I will state if in the future say if US market-cap is 5% most of the board-members(if the site is still alive by the time that happens hopefully) here will not have this allocation but still will have 50-60% exposure to US stocks.

I suspect that this Global-cap portfolio is actually the outlier here in that very few people own this type of portfolio and I can understand this in terms of the fact that a person is more likely to track their Domestic Market closely rather than International Markets so they are more likely to over-weight their Domestic Market as a result as they dont want to face the possibility of under-performing their Domestic market if they are having neglibile exposure to it.

Regards,
Anon9001.
Last edited by Anon9001 on Tue Feb 28, 2023 12:39 pm, edited 1 time in total.
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Re: Is 50% of Equities too much in Domestic Stocks (India)?

Post by MarkRoulo »

Anon9001 wrote: Tue Feb 28, 2023 9:43 am
MarkRoulo wrote: Tue Feb 28, 2023 9:35 am India's GDP is roughly the same size as that of France's or the United Kingdom's.

A "check" on your thinking is to ask yourself if you would be comfortable with 50% of your equity exposure being domestic if you were a French person living in France or a British person living in the UK. Or, presumably, an Indian person who expected to live and retire in either of these two countries.
On a risk of the topic going off-course I would still like to correct that's a nominal GDP. Now I know its quite common to use this as if it is not having flaws but it is having flaws in that it is using market exchange rate for converting GDP in local currency to USD when GDP of a country is "Total Value of Non-Traded and Traded Goods/Services in a Country in a given Year". Using a market-exchange rate for non-traded goods tends to under-estimate their value. For instance a Big Mac in US is 5.15 USD whereas in India its 2.39 USD. Now its not exactly similar due to the fact that there is no Beef in the "Big Mac" in India but still it indicates that using a market exchange rate is not valid for non-traded goods.

Due to this If you are using nominal GDP you will actually overestimate GDP of countries which are expensive to live in and underestimate GDP of countries which are cheap to live in.

Hence the valid thing to look at is GDP PPP and if you look there India is 3rd Largest Economy in the World behind just USA and China. Now France/UK instead of being same size as Indian Economy is now 32% of India's GDP.

Regards,
Anon9001.
Sure, then as a "check" you can ask yourself whether you would be comfortable putting 50% of your equities in Japanese stocks if you were planning on living and retiring in Japan.

I can already anticipate your response: India's economy is growing faster than Japan's.

Which is true.

So maybe there aren't any comparable/equivalent investments and you'll just need to think of investing 50% of your equities in India as a unique circumstance. If so, good luck with whatever you choose because sample sizes of "1" are always tricky to deal with confidently :-)
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Re: Is 50% of Equities too much in Domestic Stocks (India)?

Post by Anon9001 »

MarkRoulo wrote: Tue Feb 28, 2023 9:57 am Sure, then as a "check" you can ask yourself whether you would be comfortable putting 50% of your equities in Japanese stocks if you were planning on living and retiring in Japan.

I can already anticipate your response: India's economy is growing faster than Japan's.

Which is true.

So maybe there aren't any comparable/equivalent investments and you'll just need to think of investing 50% of your equities in India as a unique circumstance. If so, good luck with whatever you choose because sample sizes of "1" are always tricky to deal with confidently :-)
if I was born in Japan that would probably be my allocation. Sligthly higher actually at 60% but considering I am not born there though if I was just planning to live and retire there I would probably have 35-40% exposure to the domestic market. I don't believe in these meaningless 10-20% exposures as they are not likely to make a difference unless the home market is very volatile. I also have a lot of respect for Japan as country so I might be biased in this regard :wink:

In regards to GDP Growth and Stock Market Return. You might find it interesting that I also posted scatter plot here recently showing the correlation between Country 30 Year Real GDP Growth and 30 Year Stock Market Real Return of that Country and its 0 so I know GDP growth is actually meaningless at predicting stock market return.

Thanks,
Anon9001.
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Re: Is 50% of Equities too much in Domestic Stocks (India)?

Post by Anon9001 »

I forgot to mention but there is a taxation difference between Domestic Equities and Foreign Equities. Domestic Equities are taxed at 15% if sold before 1 year (STCG) and 10% if sold after 1 year (LTCG) whereas Foreign Equities are taxed same as Debt/Gold Asset Classes i.e. at income slab rates before 3 years (STCG) and after 3 years 20% tax (LTCG) but with Inflation Indexation (you can adjust the Principal Amount against Indian Inflation).

I done some research on this LTCG Taxation Difference and I found out that its negligible if the return you are having when you are selling the investment is at or near inflation but if the return you are having is significantly above Inflation then 10% tax is preferable. There is also a case where if the return you are having when you are selling the investment is below inflation then the 20% tax is actually better than the 10% tax as you don’t have to pay tax on nominal gains due to the Inflation Adjustment.

I believe that due to Domestic Equities having better taxation than Foreign Equities (if the Foreign Equities is having return significantly above Indian Inflation) it bolsters the case to not own them in play money allocation (5-10%) but in more meaningful quantities of 50-60%. Of course these taxation laws are subject to change. If in future the domestic and foreign equities are taxed then the optimal weightage to Domestic Equities could be as low as 35%.

Thanks and Regards,
Anon9001.
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Re: Is 50% of Equities too much in Domestic Stocks (India)?

Post by Valuethinker »

This is such an interesting case study in the causes of home country bias.

The familiarity bias in human thinking is just writ so very large.

Motivated cognition written all over it (perhaps for both sides? ;-)).
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Re: Is 50% of Equities too much in Domestic Stocks (India)?

Post by Anon9001 »

I believe the best portfolio is one you can stick with. The question though is are these portfolios with minimal home bias actually something that people own for long-term? I don't think so because the degree of underperformance relative to Domestic Markets can be quite severe due to the minimal weightage "Global" Index have in markets other in USA.

Just as an example here is a log-chart comparing the values of MSCI India USD, MSCI USA USD and MSCI ACWI USD from 2000-2010. The CAGR for MSCI India is 19.2% whereas for USA its 1.5% and ACWI is 3.7% from 2000-2010. Would anyone be willing to tolerate this level of under-performance? Its easy to say "Stay the Course" but how much people would be willing to tolerate this? Just consider how much people here ditched Ex-US due to the under-performance it is having recently relative to USA.

Regards,
Anon9001.

EDIT: Fixed mistakes.

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Re: Is 50% of Equities too much in Domestic Stocks (India)?

Post by Valuethinker »

Anon9001 wrote: Wed Mar 01, 2023 4:34 am I believe the best portfolio is one you can stick with. The question though is are these portfolios with minimal home bias actually something that people own for long-term? I don't think so because the degree of underperformance relative to Domestic Markets can be quite severe due to the minimal weightage "Global" Index have in markets other in USA.

Just as an example here is a log-chart comparing the values of MSCI India USD, MSCI USA USD and MSCI ACWI USD from 2000-2010. The CAGR for MSCI India is 19.2% whereas for USA its 1.5% and ACWI is 3.7% from 2000-2010. Would anyone be willing to tolerate this level of under-performance? Its easy to say "Stay the Course" but how much people would be willing to tolerate this? Just consider how much people here ditched Ex-US due to the under-performance it is having recently relative to USA.

Regards,
Anon9001.

EDIT: Fixed mistakes.

Image
1. of course most people don't face that degree of underperformance. International indices don't diverge from the USA that much.

2. if you take an EM index then things can be different. You can analyse that index and see if you are comfortable with the industries, the spread of ownership groups, the degree of exposure to changes in politics. (I did find an Investment Trust that, in EM, was heavily weighted towards Indian consumer stocks, and I did own it, unfortunately the manager (Fundsmith) decided to close it for poor performance (I felt their core investment case was still good).

3. whether people will/ will not "stay the course" is not really relevant to your decision. That performance is in the past. It's not an argument for Home Country Bias. Nor is any argument that runs "Well most investors have an even greater Home Country Bias".

Put it another way, if India underperforms by that much, will you "stay the course" with your overweighting? Why or why not?

I can't quite remember if you are Indian based, but if you are not, I would definitely not overweight the home country.
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Re: Is 50% of Equities too much in Domestic Stocks (India)?

Post by Anon9001 »

Valuethinker wrote: Wed Mar 01, 2023 10:14 am 1. of course most people don't face that degree of underperformance. International indices don't diverge from the USA that much.

2. if you take an EM index then things can be different. You can analyse that index and see if you are comfortable with the industries, the spread of ownership groups, the degree of exposure to changes in politics. (I did find an Investment Trust that, in EM, was heavily weighted towards Indian consumer stocks, and I did own it, unfortunately the manager (Fundsmith) decided to close it for poor performance (I felt their core investment case was still good).

3. whether people will/ will not "stay the course" is not really relevant to your decision. That performance is in the past. It's not an argument for Home Country Bias. Nor is any argument that runs "Well most investors have an even greater Home Country Bias".

Put it another way, if India underperforms by that much, will you "stay the course" with your overweighting? Why or why not?

I can't quite remember if you are Indian based, but if you are not, I would definitely not overweight the home country.
1. I think this depends on whether we are talking about International Index’s like MSCI ACWI Ex-USA or the Individual Countries themselves. You are correct if we are just looking at this Index for comparing Int performance to US but If we look at the individual countries the performance differential can be quite wide positively (Sweden, Norway, Denmark, Hong Kong) or negatively (Greece, Italy). Home Bias refers to over-weighting individual country stock markets or if you live in Europe over-weighting Eurozone stocks. I don’t think anyone is suggesting to over-weight Ex-US stocks as a group for Home Bias?

2. I am not actually invested in any Index here because I feel the Domestic Market is more inefficient relative to Developed Markets due to how small it is. The TER of active fund I am investing into is 0.76% and its having a small 15% exposure to the famous Alphabet, Amazon, Microsoft stocks. Rest is Indian Stocks. I am having about 65% of Equities into this fund (35% of Equities is invested into NAVI TSM Fund which is a Fund of Fund investing into Vanguard Total Stock Market ETF. Total Expense Ratio including Dividend Tax and Expenses of Underlying Fund is 0.5%) and I am quite okay with this because the fund managers is investing their own money into this fund and right now Equity is small part of Total allocation. Once I get the Inheritance from Father I might switch to a passive approach as this fund is getting quite large in size and as a result now it can’t deploy significant amount of it’s capital in small and midcaps where market efficiency is lower. Here is the Factsheet of this Fund which lists the constituents of it if you are interested.


3. Well I think this matters because a person compares their investments to other investments and if person feel that their investment is lagging behind other investments they might be tempted to abandon the plan even though it might just be a "short" term under-performance. My Benchmark is the Domestic Market and I keep in mind this 2000-2010 underperformance as it could still happen again. Of course just to be objective here is a log-chart showing performance of Domestic Stocks verses MSCI ACWI USD and MSCI USA USD during 1992-2002 and 2012-2022. CAGR for MSCI USA, MSCI ACWI and MSCI India from 1992-2002 is 9.4%, 6.3%, 1.2% and for 2012-2022 is 12.5%,8.5% and 7.6% . These other time periods is why I own the Foreign Stocks and not Domestic Stocks only.

As per whether I will stick with it if it under-performs severely like US did from 2000-2010. I would say Yes as it is past performance and its probably wise to assume that past 10 year return essentially has 0 correlation with future 10 year return considering there is no evidence of Mean Reversion/Momentum at such horizons.

Image
Image

Also I don’t believe in 10-20% allocations to Domestic Equities as part of Total Equity allocation will make any meaningful difference unless the Domestic Market is pretty volatile. I think a more reasonable allocation which makes a meaningful difference is 35-40% of Equity allocation. This would be also be big enough such that the person doesn’t get FOMO if their Domestic Stocks outperform Foreign Stocks significantly while also providing a good enough protection in case a Japan/Russia scenario happens. I stated this earlier but I will repeat it again if Domestic Stocks crash by 90% and you are owning 40% of it and if Int markets do nothing and stay stable the total loss is 36% which is less than the 50% loss we are trained to expect from Equities.
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Re: Is 50% of Equities too much in Domestic Stocks (India)?

Post by Valuethinker »

Anon9001 wrote: Wed Mar 01, 2023 11:39 am
Valuethinker wrote: Wed Mar 01, 2023 10:14 am 1. of course most people don't face that degree of underperformance. International indices don't diverge from the USA that much.

2. if you take an EM index then things can be different. You can analyse that index and see if you are comfortable with the industries, the spread of ownership groups, the degree of exposure to changes in politics. (I did find an Investment Trust that, in EM, was heavily weighted towards Indian consumer stocks, and I did own it, unfortunately the manager (Fundsmith) decided to close it for poor performance (I felt their core investment case was still good).

3. whether people will/ will not "stay the course" is not really relevant to your decision. That performance is in the past. It's not an argument for Home Country Bias. Nor is any argument that runs "Well most investors have an even greater Home Country Bias".

Put it another way, if India underperforms by that much, will you "stay the course" with your overweighting? Why or why not?

I can't quite remember if you are Indian based, but if you are not, I would definitely not overweight the home country.
1. I think this depends on whether we are talking about International Index’s like MSCI ACWI Ex-USA or the Individual Countries themselves. You are correct if we are just looking at this Index for comparing Int performance to US but If we look at the individual countries the performance differential can be quite wide positively (Sweden, Norway, Denmark, Hong Kong) or negatively (Greece, Italy). Home Bias refers to over-weighting individual country stock markets or if you live in Europe over-weighting Eurozone stocks. I don’t think anyone is suggesting to over-weight Ex-US stocks as a group for Home Bias?
We are just going to into loops on destinations here.

People avoid home country bias for good reasons. Of course human nature & institutional barriers (which aren't really there any more) mean there's a lot of home country bias out there, even stripping out US investors. There is a tax drag on foreign investing, for many investors.
2. I am not actually invested in any Index here because I feel the Domestic Market is more inefficient relative to Developed Markets due to how small it is. The TER of active fund I am investing into is 0.76% and its having a small 15% exposure to the famous Alphabet, Amazon, Microsoft stocks. Rest is Indian Stocks. I am having about 65% of Equities into this fund (35% of Equities is invested into NAVI TSM Fund which is a Fund of Fund investing into Vanguard Total Stock Market ETF. Total Expense Ratio including Dividend Tax and Expenses of Underlying Fund is 0.5%) and I am quite okay with this because the fund managers is investing their own money into this fund and right now Equity is small part of Total allocation. Once I get the Inheritance from Father I might switch to a passive approach as this fund is getting quite large in size and as a result now it can’t deploy significant amount of it’s capital in small and midcaps where market efficiency is lower. Here is the Factsheet of this Fund which lists the constituents of it if you are interested.
Funny to call a stock index with multi-billion dollar market cap constituents small ;-).

I think the inefficiency of the Indian market stems from the usual factors: high degree of insider trading & government involvement, etc. I am not convinced a fund manager can necessarily exploit that.

(I used to sit next to the guy who, in the 1990s, ran the one of the largest foreign mutual fund invested in India. He was fairly sceptical of the Indian market, ironically. A wall of money had gone in, driven up prices, insiders sold down, market underperforms. Money goes out. He thought the ability for external shareholders to make money in these stocks was limited. That's certainly been the case in China - although India is fundamentally much more of a rule of law/ capitalist society).

3. Well I think this matters because a person compares their investments to other investments and if person feel that their investment is lagging behind other investments they might be tempted to abandon the plan even though it might just be a "short" term under-performance. My Benchmark is the Domestic Market and I keep in mind this 2000-2010 underperformance as it could still happen again. Of course just to be objective here is a log-chart showing performance of Domestic Stocks verses MSCI ACWI USD and MSCI USA USD during 1992-2002 and 2012-2022. CAGR for MSCI USA, MSCI ACWI and MSCI India from 1992-2002 is 9.4%, 6.3%, 1.2% and for 2012-2022 is 12.5%,8.5% and 7.6% . These other time periods is why I own the Foreign Stocks and not Domestic Stocks only.
Good. At least you are aware of the problem of home country bias.

I think, as a general principle, that we should on these boards stress the optimal portfolio, in line with academic theory. If people choose to deviate, that's their look out.

"Stay the course" is a mantra here. Set your target weightings, and stick to them.
As per whether I will stick with it if it under-performs severely like US did from 2000-2010. I would say Yes as it is past performance and its probably wise to assume that past 10 year return essentially has 0 correlation with future 10 year return considering there is no evidence of Mean Reversion/Momentum at such horizons.

Image
Image

Also I don’t believe in 10-20% allocations to Domestic Equities as part of Total Equity allocation will make any meaningful difference unless the Domestic Market is pretty volatile. I think a more reasonable allocation which makes a meaningful difference is 35-40% of Equity allocation. This would be also be big enough such that the person doesn’t get FOMO if their Domestic Stocks outperform Foreign Stocks significantly while also providing a good enough protection in case a Japan/Russia scenario happens. I stated this earlier but I will repeat it again if Domestic Stocks crash by 90% and you are owning 40% of it and if Int markets do nothing and stay stable the total loss is 36% which is less than the 50% loss we are trained to expect from Equities.
Of course if the 90% loss hits, when the 50% loss hits in global markets, it's really going to hurt.

In essence your argument with Indian markets (assuming you are Non-resident Indian?) is that you are familiar with the companies, comfortable with the risks, and think India has a bullish future? Thus you are highly comfortable overweighting, and you have a Fear of Missing Out if you were not substantially overweighted (something like 25x India's actual capitalisation weight in world markets?).
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Re: Is 50% of Equities too much in Domestic Stocks (India)?

Post by Anon9001 »

Valuethinker wrote: Thu Mar 02, 2023 2:48 am Of course if the 90% loss hits, when the 50% loss hits in global markets, it's really going to hurt.

In essence your argument with Indian markets (assuming you are Non-resident Indian?) is that you are familiar with the companies, comfortable with the risks, and think India has a bullish future? Thus you are highly comfortable overweighting, and you have a Fear of Missing Out if you were not substantially overweighted (something like 25x India's actual capitalisation weight in world markets?).
I am not a Non Resident Indian otherwise why I would be talking about Indian Taxation of Foreign Equities? I know US taxes their citizens even if they don't live there but other than them and Tajikistan, Hungary, Eritrea and Myanmar no-one else does this.

The primary reason for over-weighting Domestic Equities is the local taxation is better (if Foreign Equities are returning Significantly Above Indian Inflation) and also the reasons you are stating. And its actually 30x India's Free Float Capitalization Weight in World Markets (1.7% last I checked). Although do note that this huge over-weighting is true for every non-US investor who is having a Home Bias due to the fact that even second largest country in World Index Japan is only having 6% weightage. You might be suprised to learn as of 2014 Japanese Investors invest 55% into Japanese Equities even though only in November 2020 the Japanese Index (with Dividends Reinvested) recovered from the Dec 1989 Peak.

Regards,
Anon9001.

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Re: Is 50% of Equities too much in Domestic Stocks (India)?

Post by Valuethinker »

Anon9001 wrote: Fri Mar 03, 2023 1:08 pm
Valuethinker wrote: Thu Mar 02, 2023 2:48 am Of course if the 90% loss hits, when the 50% loss hits in global markets, it's really going to hurt.

In essence your argument with Indian markets (assuming you are Non-resident Indian?) is that you are familiar with the companies, comfortable with the risks, and think India has a bullish future? Thus you are highly comfortable overweighting, and you have a Fear of Missing Out if you were not substantially overweighted (something like 25x India's actual capitalisation weight in world markets?).
I am not a Non Resident Indian otherwise why I would be talking about Indian Taxation of Foreign Equities? I know US taxes their citizens even if they don't live there but other than them and Tajikistan, Hungary, Eritrea and Myanmar no-one else does this.
You post enough that I don't necessarily keep track of your personal details. It was an innocent enough question. Do you want to discuss, or do you want to be outraged?

You posed a question at the beginning of this thread.

To be clear, my answer is:

Yes it is too much. For all the reasons advanced in this thread. But basically concentration of risk in a thinly capitalised emerging market stock market, very subject to macroeconomic and political volatility.

Did you want an answer to the question you posed, or did you mean this to be a rhetorical question, that you would "rebut" by stating your priors?

The primary reason for over-weighting Domestic Equities is the local taxation is better (if Foreign Equities are returning Significantly Above Indian Inflation) and also the reasons you are stating. And its actually 30x India's Free Float Capitalization Weight in World Markets (1.7% last I checked). Although do note that this huge over-weighting is true for every non-US investor who is having a Home Bias due to the fact that even second largest country in World Index Japan is only having 6% weightage. You might be suprised to learn as of 2014 Japanese Investors invest 55% into Japanese Equities even though only in November 2020 the Japanese Index (with Dividends Reinvested) recovered from the Dec 1989 Peak.

So:

-there's a tax advantage to home country bias (for you)
- it's actually a very big home country bias in your portfolio
- in other countries, investors also have a home country bias
- even in Japan

Therefore

- it's OK to have a large overweighting?

Is that your argument?

In actual fact, there is some reduction in exchange rate exposure by holding domestic equities. In a fully developed funds market, one can achieve that by holding global equity funds but hedged to your home currency.

I have so many GBP assets of other types (pension & labour income, home equity) that I don't hold too many more GBP assets (primarily sterling-hedged bonds, in pensions -- there are reasons specific to the gilt index (very long duration) that made me want not to just hold UK govt bonds).
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Re: Is 50% of Equities too much in Domestic Stocks (India)?

Post by Anon9001 »

Valuethinker wrote: Sun Mar 05, 2023 6:27 am -there's a tax advantage to home country bias (for you)
- it's actually a very big home country bias in your portfolio
- in other countries, investors also have a home country bias
- even in Japan

Therefore

- it's OK to have a large overweighting?

Is that your argument?

In actual fact, there is some reduction in exchange rate exposure by holding domestic equities. In a fully developed funds market, one can achieve that by holding global equity funds but hedged to your home currency.

I have so many GBP assets of other types (pension & labour income, home equity) that I don't hold too many more GBP assets (primarily sterling-hedged bonds, in pensions -- there are reasons specific to the gilt index (very long duration) that made me want not to just hold UK govt bonds).
Apologies I didn't intend the first statement to be hostile in tone but rather expressing confusion on why you thought I was NRI. Anyway moving on.

Regarding your question "Did you want an answer to the question you posed, or did you mean this to be a rhetorical question, that you would "rebut" by stating your priors?":

I think the issue is I am not seeing any data from you backing up your arguments. Its just your opinions regarding illiquidity, political and macroeconomic stability of home country. I mean its fine to state opinions but if you want to convince me you have to give me quantitative data. I given you data before suggesting that the risk of 50% Domestic Stocks is actually only 15% higher than MSCI USA if we consider Volatility as a valid measure of risk (if we consider Ulcer Index as valid measure its 28% less risky) but you seem to be ignoring what I stated earlier even though I believe that I am actually over-estimating the risk of Domestic Stocks as the risk measures are calculated from 1979-2022 and in the starting year 1979 there was no securities market regulator (whereas there is a regulator now) so back then the stock market was literally a casino.

I personally believe that the taxation reasons and the fact that my benchmark is not MSCI World but rather MSCI India is why owning only 10-20% in Domestic Equities is not acceptable to me. Also the fact that the risk measures I am looking at don't suggest a 50% allocation to Indian Equities is much more risky than 100% US allocation. Look we need to clear we are talking about two types of Equities. The way you are stating things its like USA Equities is like T-Bill and Indian Equities is like a Speculative Asset with no Cash Flows when in reality they are both risk assets. Sure one is less risky than the other but the magnitude of the risk reduction is not so massive that owning 50% of Indian Stocks is noticeably more risky than 100% US Equities.

Also I forgotten to mention the Expropriation Risk. This risk is often under-estimated by people and hence the recommendation to own only 10-20% in Domestic Stocks but I feel this risk is still there and if you are to consider this risk seriously I believe much more home bias is justified considering there is no guarantee that the foreign country won't confiscate your holdings. A person could argue this risk depends on the home country's relationship with foreign country so Allied countries like say USA and Israel the risk of confiscation is low for foreign investors in each countries but I believe alliances/enemies are never permanent so this confiscation risk is always present even for "Allied" countries. In regards to India and US I believe if in Future India becomes as powerful as China then US will become hostile to it. No doubt about it. I am wondering whether at that stage whether they would confiscate my foreign investments. Considering I cant state confidently that they won't I don't want to own too much in US stocks.

Regards,
Anon9001.
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Re: Is 50% of Equities too much in Domestic Stocks (India)?

Post by Valuethinker »

Anon9001 wrote: Sun Mar 05, 2023 10:20 am
Valuethinker wrote: Sun Mar 05, 2023 6:27 am -there's a tax advantage to home country bias (for you)
- it's actually a very big home country bias in your portfolio
- in other countries, investors also have a home country bias
- even in Japan

Therefore

- it's OK to have a large overweighting?

Is that your argument?

In actual fact, there is some reduction in exchange rate exposure by holding domestic equities. In a fully developed funds market, one can achieve that by holding global equity funds but hedged to your home currency.

I have so many GBP assets of other types (pension & labour income, home equity) that I don't hold too many more GBP assets (primarily sterling-hedged bonds, in pensions -- there are reasons specific to the gilt index (very long duration) that made me want not to just hold UK govt bonds).
Apologies I didn't intend the first statement to be hostile in tone but rather expressing confusion on why you thought I was NRI. Anyway moving on.

Regarding your question "Did you want an answer to the question you posed, or did you mean this to be a rhetorical question, that you would "rebut" by stating your priors?":

I think the issue is I am not seeing any data from you backing up your arguments. Its just your opinions regarding illiquidity, political and macroeconomic stability of home country. I mean its fine to state opinions but if you want to convince me you have to give me quantitative data. I given you data before suggesting that the risk of 50% Domestic Stocks is actually only 15% higher than MSCI USA if we consider Volatility as a valid measure of risk (if we consider Ulcer Index as valid measure its 28% less risky) but you seem to be ignoring what I stated earlier even though I believe that I am actually over-estimating the risk of Domestic Stocks as the risk measures are calculated from 1979-2022 and in the starting year 1979 there was no securities market regulator (whereas there is a regulator now) so back then the stock market was literally a casino.

I personally believe that the taxation reasons and the fact that my benchmark is not MSCI World but rather MSCI India is why owning only 10-20% in Domestic Equities is not acceptable to me. Also the fact that the risk measures I am looking at don't suggest a 50% allocation to Indian Equities is much more risky than 100% US allocation. Look we need to clear we are talking about two types of Equities. The way you are stating things its like USA Equities is like T-Bill and Indian Equities is like a Speculative Asset with no Cash Flows when in reality they are both risk assets. Sure one is less risky than the other but the magnitude of the risk reduction is not so massive that owning 50% of Indian Stocks is noticeably more risky than 100% US Equities.

Also I forgotten to mention the Expropriation Risk. This risk is often under-estimated by people and hence the recommendation to own only 10-20% in Domestic Stocks but I feel this risk is still there and if you are to consider this risk seriously I believe much more home bias is justified considering there is no guarantee that the foreign country won't confiscate your holdings. A person could argue this risk depends on the home country's relationship with foreign country so Allied countries like say USA and Israel the risk of confiscation is low for foreign investors in each countries but I believe alliances/enemies are never permanent so this confiscation risk is always present even for "Allied" countries. In regards to India and US I believe if in Future India becomes as powerful as China then US will become hostile to it. No doubt about it. I am wondering whether at that stage whether they would confiscate my foreign investments. Considering I cant state confidently that they won't I don't want to own too much in US stocks.

Regards,
Anon9001.
Let's leave it that I am against home country bias.

You posed the question in the title to the thread "Is 50% too much?" I answered "yes". And you have answered your own question ie "no". It makes me wonder why you posed the question.

Geopolitical speculations are... geopolitical speculations. I didn't see the Ukraine war coming, nor Russian assets (for foreign funds) going to zero. Yet that war had been in progress since 2014.

Doubtless the world will throw up other surprises.
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Re: Is 50% of Equities too much in Domestic Stocks (India)?

Post by Anon9001 »

Valuethinker wrote: Mon Mar 06, 2023 3:10 am Let's leave it that I am against home country bias.

You posed the question in the title to the thread "Is 50% too much?" I answered "yes". And you have answered your own question ie "no". It makes me wonder why you posed the question.

Geopolitical speculations are... geopolitical speculations. I didn't see the Ukraine war coming, nor Russian assets (for foreign funds) going to zero. Yet that war had been in progress since 2014.

Doubtless the world will throw up other surprises.
Okay so with the recent taxation changes I think a update is due here. To simplify now any fund which is having less than 35% exposure to Indian Equities will be taxed at Income Tax Slab Rates which can go up to 42% (Including Surcharges) without any Inflation Adjustment (depending on how large the Taxable Income is) whereas before Fund like this was taxed at 20% with Inflation Adjustment for Principal Amount. Lucky for me this rule is only applicable to new investments made after April 1st 2023 so my Existing Investments aren't effected by this rule even if I sell them after April 1st for Rebalancing but this does complicates any new money I put in as that would be taxed at slab rates when I sell.

What I am thinking is I will just wait for a new fund to launch which is having 60% weightage to Foreign Equities and 40% weight to Domestic Equities so that the fund is taxed at 20% with Inflation Adjustment for Principal Amount.

So I guess the question is now irrelevant as I don't want to pay heavy Taxation up to 42%. :wink:

One good thing though about this is that now there will be funds which are having a sizeable exposure to both Foreign Equities and Indian Equities whereas before I needed to own separate funds for each (in order to have a sizeable exposure to each) which is inefficient in regards to Taxation as I have to pay Tax on Rebalancing whereas Indian Taxation Laws don't tax Fund if it is doing transactions so when these type of funds launch I will probably simplify to a One Fund Portfolio due to the Taxation Advantage they have.

Regards,
Anon9001.
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Re: Is 50% of Equities too much in Domestic Stocks (India)?

Post by JoMoney »

Equities are risky. Nobody can tell you what your risk tolerance is, and from that nobody can tell you what your allocation to those risks should be. There are country specific risks, some of which impact all the money and businesses operating in a country, and some that might only be a risk to foreign investors in that country or currency.
I know I would be less comfortable having a majority of my assets outside the country I have legal rights in, and the currency my liabilities are denominated in. Or I might say it would represent a distrust of the rule of law and the currency in my home country for me to feel more comfortable with the majority of my assets and currency being somewhere else.
"To achieve satisfactory investment results is easier than most people realize; to achieve superior results is harder than it looks." - Benjamin Graham
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Re: Is 50% of Equities too much in Domestic Stocks (India)?

Post by Valuethinker »

JoMoney wrote: Sun Apr 02, 2023 11:14 am Equities are risky. Nobody can tell you what your risk tolerance is, and from that nobody can tell you what your allocation to those risks should be. There are country specific risks, some of which impact all the money and businesses operating in a country, and some that might only be a risk to foreign investors in that country or currency.
I know I would be less comfortable having a majority of my assets outside the country I have legal rights in, and the currency my liabilities are denominated in. Or I might say it would represent a distrust of the rule of law and the currency in my home country for me to feel more comfortable with the majority of my assets and currency being somewhere else.
Except. OP is in India. You are in USA.

There's a huge difference in the length of history and a difference in the amount of political interference.

Canada has as long a history (if we count the British history before 1867) as the USA of political stability & respect for private property.

Nonetheless a Canadian is ill-advised to have a large home country bias. c 70-80% of the Canadian index is financials + natural resources stocks. There's very little tech or healthcare. More than 5% of $100 put into a Canadian mutual fund is *one bank*.

A Canadian is best advised to hold a global portfolio. This would be true for any investor resident in "small stock market" countries. Which, other than the USA, is basically all of them.
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Re: Is 50% of Equities too much in Domestic Stocks (India)?

Post by Anon9001 »

Valuethinker wrote: Mon Apr 03, 2023 8:18 am A Canadian is best advised to hold a global portfolio. This would be true for any investor resident in "small stock market" countries. Which, other than the USA, is basically all of them.
:confused Strange how you are adament on the Global Portfolio even though I told you right now that any fund which is having less than 35% exposure to Domestic Equities is having Capital Gains taxable up to 42% with no Inflation Adjustment for Principal Amount whereas Domestic Equities are Taxed at 10% without Inflation Adjustment for Principal. Only Funds which are having >35% exposure to Indian Equities are now taxed at 20% with Inflation Adjustment for Principal Amount.

Like I said before though this rule only applies to new investments made after April 1st so my existing investments in Foreign Equity Fund won't be taxed at Slab Rates (which can go up to 42%) even if I sell them after April 1st.

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Re: Is 50% of Equities too much in Domestic Stocks (India)?

Post by aurorion »

Thanks for this thread. As a fellow Indian (one without any large real estate inheritance to look forward to, though! :D ), your concerns are familiar to me. I too have a home country bias in my equity portfolio - but I have reduced it from 90%+ to ~55% in the past two years, mainly by investing in VWRA. I am an NRI, so invest through IBKR - but I plan to return to India within a few years.

Like you mentioned, the recent tax changes in India have made foreign equities significantly less attractive compared to domestic equities. But I have been researching about the changes, and am confused about which types of investments would be impacted by these changes. For example, a quote in this article implies that "direct foreign equity/ETFs through LRS mode" will remain under the old taxation rules.

Does anyone here have clarity on taxation for different foreign investment options for Indian residents, after the recent changes? For example, a non-exhaustive list of different options that may or may not have different tax treatments:
  1. Direct equity: for example AAPL or GOOG, bought through IBKR, Vested, etc.
  2. ETFs listed in other jurisdictions for foreign equities: for example VWRA or SPY, via IBKR, Vested, etc.
  3. ETFs listed in other jurisdictions for debt: e.g. AGGG
  4. ETFs listed in other jurisdictions for gold: e.g. GLD
  5. Non-listed funds domiciled in other jurisdictions, for example invested via private bankers
  6. ETFs listed in India for foreign equities: e.g. Motilal Oswal Nasdaq
  7. Mutual funds registered in India that invest directly in foreign equities
  8. FoF mutual funds registered in India that invest in other ETFs or funds listed abroad: e.g. the Navi US Total Stock Market Fund of Fund

Anon9001 wrote: Sun Apr 02, 2023 10:58 am
Valuethinker wrote: Mon Mar 06, 2023 3:10 am Let's leave it that I am against home country bias.

You posed the question in the title to the thread "Is 50% too much?" I answered "yes". And you have answered your own question ie "no". It makes me wonder why you posed the question.

Geopolitical speculations are... geopolitical speculations. I didn't see the Ukraine war coming, nor Russian assets (for foreign funds) going to zero. Yet that war had been in progress since 2014.

Doubtless the world will throw up other surprises.
Okay so with the recent taxation changes I think a update is due here. To simplify now any fund which is having less than 35% exposure to Indian Equities will be taxed at Income Tax Slab Rates which can go up to 42% (Including Surcharges) without any Inflation Adjustment (depending on how large the Taxable Income is) whereas before Fund like this was taxed at 20% with Inflation Adjustment for Principal Amount. Lucky for me this rule is only applicable to new investments made after April 1st 2023 so my Existing Investments aren't effected by this rule even if I sell them after April 1st for Rebalancing but this does complicates any new money I put in as that would be taxed at slab rates when I sell.

What I am thinking is I will just wait for a new fund to launch which is having 60% weightage to Foreign Equities and 40% weight to Domestic Equities so that the fund is taxed at 20% with Inflation Adjustment for Principal Amount.

So I guess the question is now irrelevant as I don't want to pay heavy Taxation up to 42%. :wink:

One good thing though about this is that now there will be funds which are having a sizeable exposure to both Foreign Equities and Indian Equities whereas before I needed to own separate funds for each (in order to have a sizeable exposure to each) which is inefficient in regards to Taxation as I have to pay Tax on Rebalancing whereas Indian Taxation Laws don't tax Fund if it is doing transactions so when these type of funds launch I will probably simplify to a One Fund Portfolio due to the Taxation Advantage they have.

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Anon9001.
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Re: Is 50% of Equities too much in Domestic Stocks (India)?

Post by Anon9001 »

aurorion wrote: Tue Apr 11, 2023 1:39 am Like you mentioned, the recent tax changes in India have made foreign equities significantly less attractive compared to domestic equities. But I have been researching about the changes, and am confused about which types of investments would be impacted by these changes. For example, a quote in this article implies that "direct foreign equity/ETFs through LRS mode" will remain under the old taxation rules.

Does anyone here have clarity on taxation for different foreign investment options for Indian residents, after the recent changes? For example, a non-exhaustive list of different options that may or may not have different tax treatments:
  1. Direct equity: for example AAPL or GOOG, bought through IBKR, Vested, etc.
  2. ETFs listed in other jurisdictions for foreign equities: for example VWRA or SPY, via IBKR, Vested, etc.
  3. ETFs listed in other jurisdictions for debt: e.g. AGGG
  4. ETFs listed in other jurisdictions for gold: e.g. GLD
  5. Non-listed funds domiciled in other jurisdictions, for example invested via private bankers
  6. ETFs listed in India for foreign equities: e.g. Motilal Oswal Nasdaq
  7. Mutual funds registered in India that invest directly in foreign equities
  8. FoF mutual funds registered in India that invest in other ETFs or funds listed abroad: e.g. the Navi US Total Stock Market Fund of Fund
Sorry for the late reply I was busy and do take what I am saying with a grain of salt as I am not a Tax Guru/Expert but I believe 1-5 are having same Taxation as Unlisted Shares meaning STCG (<24 months) is Slab Rates and LTCG is 20% with Indexation (>24 months). However I am not sure with the recent change in Taxation whether this still applies.

As per 6-8 the Taxation Change would definitely be applicable as these are Indian Domiciled Funds. Also I believe FOF's even though they are investing 100% into Indian Equity Mutual Funds/ETF's will be effected by this taking the Passage "Specific Mutual Fund not >35% into Equity Shares of Domestic Companies" literally.


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Anon9001.
Land/Real Estate:89.4% (Land/RE is Inheritance which will be recieved in 10-20 years) Equities:7.6% Fixed Income:1.7% Gold:0.8% Cryptocurrency:0.5%
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Re: Is 50% of Equities too much in Domestic Stocks (India)?

Post by Anon9001 »

aurorion wrote: Tue Apr 11, 2023 1:39 am Like you mentioned, the recent tax changes in India have made foreign equities significantly less attractive compared to domestic equities. But I have been researching about the changes, and am confused about which types of investments would be impacted by these changes. For example, a quote in this article implies that "direct foreign equity/ETFs through LRS mode" will remain under the old taxation rules.
So I just asked Galactic Advisors about this through email and I got a confirmation that Direct Foreign Equity will be taxed at 20% with Indexation if you sell after 24 months (Before 24 months it is STCG hence it is Taxed at Slab Rates) but Foreign Domiciled ETF's/Mutual Funds will be taxed at Slab Rates even if you sell them after 36 months (Before 36 months it is STCG so Taxation is Slab Rates) so looks like best option is to just wait for these AMC's to launch these 60 Foreign Equity 40 Domestic Equity Funds.
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Considering I want to know how these new funds will perform I back-tested 60% allocations to Nasdaq, MSCI USA, MSCI World Ex-Japan and Nasdaq ,Gold Combination and compared them to 100% Sensex Portfolio. All the Portfolios are rebalanced Yearly.

The Median 20 Year Rolling IRR of 100% Sensex Portfolio, 60% Nasdaq 40% Sensex Portfolio, 60% MSCI USA 40% Sensex Portfolio, 60% MSCI World Ex-Japan 40% Sensex Portfolio and 40% Sensex 35% Nasdaq 25% Gold Portfolio is 7.5%, 9.4%, 6.3%, 5.8% and 8.4% respectively. Minimum 20 Year Rolling IRR is 3.7%, 5.5%, 3.0%, 3.0% and 6.2% respectively. Maximum 20 Year Rolling IRR is 14.2%, 23.4%, 16.8%, 16.0% and 16.0% respectively.

What is surprising to me is how the Nasdaq Portfolio is doing much better than the MSCI USA/S&P 500 Portfolio in terms of Minimum 20 Year Rolling Return even though Nasdaq is considered riskier than S&P 500.

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Also just for fun here is a comparison of 100% MSCI USA, MSCI World Ex-JAP, Sensex and Nasdaq. Considering the high Taxation of owning Pure Int Funds these comparisons are just for fun but I have had people here recommend this Global Index to me even when it along with MSCI USA is a Dud. The Minimum 20 Year Rolling Return for these two is actually worse than Sensex :oops:

The only Foreign Equity Index which is doing good here is the Nasdaq Index which explains why a Portfolio of Nasdaq and Indian Equities is doing better than the other Portfolios with Foreign Equities.

Image

Regards,
Anon9001.
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Re: Is 50% of Equities too much in Domestic Stocks (India)?

Post by aurorion »

Anon9001 wrote: Mon Apr 17, 2023 9:10 am So I just asked Galactic Advisors about this through email and I got a confirmation that Direct Foreign Equity will be taxed at 20% with Indexation if you sell after 24 months (Before 24 months it is STCG hence it is Taxed at Slab Rates) but Foreign Domiciled ETF's/Mutual Funds will be taxed at Slab Rates even if you sell them after 36 months (Before 36 months it is STCG so Taxation is Slab Rates) so looks like best option is to just wait for these AMC's to launch these 60 Foreign Equity 40 Domestic Equity Funds.
Thanks for this, much appreciated. :thumbsup :thumbsup And apologies for the late response, I am a rather casual visitor here rather than a regular follower.

I have been asking around in other forums also about this, and the general feel I get is that further changes can be expected in the tax code in the coming years to clarify these points around ETFs and mutual funds for gold and international equity. But for now, I think the interpretation given by your contact seems to be safe.
Anon9001 wrote: Mon Apr 17, 2023 9:10 amAlso just for fun here is a comparison of 100% MSCI USA, MSCI World Ex-JAP, Sensex and Nasdaq. Considering the high Taxation of owning Pure Int Funds these comparisons are just for fun but I have had people here recommend this Global Index to me even when it along with MSCI USA is a Dud. The Minimum 20 Year Rolling Return for these two is actually worse than Sensex :oops:

The only Foreign Equity Index which is doing good here is the Nasdaq Index which explains why a Portfolio of Nasdaq and Indian Equities is doing better than the other Portfolios with Foreign Equities.
Great analysis. But as I am sure you know already:
1. Past performance is no guarantee of future performance.
2. The rationale for investing in a broad global index vs. narrower indices like SPX or NASDAQ is similar to the rationale for index investing vs. active investing by choosing sectors (or even specific stocks).
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