How Indian investments diversify your portfolio

Any investment advisor will tell you that one should diversify one's investment portfolio. But what exactly does this mean?.

An example: say you have $100 to invest and you are considering two stocks - an oil company and an airline firm. If you put all your money on the oil stock, then you will loose a lot of money if the price of crude oil falls. On the other hand, if the price of oil goes up, the airline stock will fall as it's energy costs rise. If however, you put $50 in each the paper value of your portfolio will fluctuate much lesser with variations in the price of crude oil. If you sell at the right time, you will make profits, while reducing the downside risk to your portfolio.

How does this apply to the India-US scenario?. Simple -> currency diversification. By most estimates of economists the US dollar is overvalued(on account of various macroeconomic dynamics). What happens of the dollar falls? The value of the other currencies like the Rupee and the Yuan will rise, and your investments in stocks denominated in these currencies will also rise. (without necessarily any changes in the fundamentals of the companies themselves).

The India-US scenario is growing particularly exciting on account of recent statements by the Prime Minister favoring the 'full convertibility' of the Rupee on the capital account.

I'll write about this in the next post...

Happy Investing!