Global Investing Amid Market Volatility: Should You Diversify Now?

Significant exposure to global markets could provide geographical diversification as well as exposure to underrepresented sectors in India.

[Read: Global Investment Opportunities: Best International Mutual Funds to Consider for 2025]

However, recent event about Edelweiss Mutual Fund's move to cap investments in seven of its overseas schemes leave several questions hanging.

Is this the right time for Indian investors to consider global exposure?

Should one be cautious about international funds, or does diversifying beyond domestic equities still hold merit?

Edelweiss Mutual Fund's Restriction on Global Schemes

Edelweiss Mutual Fund recently announced limitations on investments in seven of its global schemes. This decision comes amidst regulatory constraints, foreign investment limits, and challenges related to overseas allocation.

India's 13th largest asset management company (AMC) cited concerns related to maintaining liquidity and adhering to compliance norms as key reasons for capping fresh investments in these schemes at Rs 1 lakh PAN per day, effective from February 27, 2025.

The seven schemes are:

• Edelweiss ASEAN Equity Off-shore Fund

• Edelweiss Greater China Equity Off-shore Fund

• Edelweiss US Technology Equity Fund of Fund

• Edelweiss Emerging Markets Opportunities Equity Offshore Fund

• Edelweiss Europe Dynamic Equity Offshore Fund

• Edelweiss US Value Equity Off-shore Fund

• Edelweiss MSCI India Domestic & World Healthcare 45 Index Fund

This restriction impacts investors who are considering international exposure through Edelweiss schemes. It also reflects broader trends where AMCs have had to reevaluate their international strategies in light of market fluctuations and regulatory barriers.

The capital market regulator allowed mutual funds to invest in foreign stocks as long as their fund deployment adhered to the RBI ceilings. Since then, many fund houses have sporadically accepted, stopped, or capped subscriptions.

While the Indian market has shown resilience in the past, recent pullbacks in benchmark indices and sector-specific slowdowns have raised concerns about near-term growth.

When we look at historical performance, developed markets have outperformed emerging markets over the long term, making it appealing for investors to consider allocating a portion of investments to global assets. The following graph highlights the cumulative returns of key global indices, offering insights into how different markets have performed over the years.

The MSCI World Index, representing developed markets, has delivered the highest returns at 480.35, followed closely by the MSCI ACWI (All Country World Index) at 429.30, which includes both developed and emerging markets. In contrast, the MSCI Emerging Markets Index has significantly lagged, standing at 178.03, indicating relatively weaker performance in developing economies over the long term.

[Read: The Key Factors Behind the Recent Volatility in the Indian Equity Market]

This is particularly relevant in the current market scenario, where Indian equities are experiencing heightened volatility and bearish pressures. The graph reinforces the idea that global diversification especially towards developed markets could be beneficial for Indian investors seeking stability and higher long-term returns.

Given the underperformance of emerging markets, it may be prudent for investors to allocate a portion of their portfolio to global funds tracking MSCI World or ACWI indices, rather than relying solely on Indian or emerging market equities. This supports the argument that now could be an opportune time to add global exposure amid domestic market uncertainties.

Benefits of International Exposure Amidst Domestic Market Turbulence

1. Geographical Diversification

Investment on a global scale enables investors to avoid risks involved in being heavily focused in the economy of a single country. The Indian economy, though resilient, is not free from corrections and economic slumps. Being invested in international stocks may even out risks and negate the effects of domestic market losses.

2. Exposure to Global Leading Companies

Some of the largest and most innovative firms-like Apple, Microsoft, Google, and Amazon-are listed in the U.S. market. These firms provide growth opportunities that are not easily available in the Indian stock market. Likewise, European and other developed markets offer exposure to other high-growth industries.

3. Performance of the U.S. and Other Global Markets

Despite volatility, U.S. markets (S&P 500 and Nasdaq 100) have fared better than Indian benchmarks in certain phases. Global index and ETF investment offer scope to ride on global economic growth.

4. Currency Diversification

The Indian Rupee may depreciate against the U.S. Dollar in the long run. Investing in foreign currency could serve as a hedge for rupee depreciation, which proves to be beneficial in an uncertain economic climate.

The Risks Involved in Global Investing

1. Foreign Market Volatility

While the Indian markets are witnessing turmoil, global markets too face economic cycles, inflationary pressures, and geopolitical risks. International equities do not eliminate risk; they only relocate it to another geography.

2. Regulatory and Investment Limits

The Edelweiss Mutual Fund limitations point towards one of the biggest challenges that Indian investors face- restrictions on overseas investments. SEBI and RBI regulations restrict the amount that AMCs can invest in foreign markets, opening up the possibilities of bottlenecks in the ability to reach global opportunities.

3. Currency Risks

While foreign investment can serve as a hedge, it also presents currency risks for investors. An appreciation of the rupee vis-a-vis the U.S. Dollar would diminish returns on foreign investments.

4. Fees and Expense Ratios

International mutual funds and ETFs tend to have higher expense ratios than domestic funds. Investors need to consider carefully the costs of global investing.

Is This the Right Time for Global Exposure?

The Foreign Institutional Investors (FII) net flows in the Indian equity market, highlights a clear trend of capital outflows in recent months. While early 2024 witnessed periods of inflows, the latter half of the year and early 2025 saw significant withdrawals, with notable dips in October 2024, January 2025, and February 2025.

[Read: Equity, Debt, and Gold - Performance Review and Investment Outlook for 2025]

This suggests that foreign investors are pulling back from Indian equities, likely due to concerns over market volatility, macroeconomic uncertainties, and global interest rate trends. Instead, they appear to be reallocating their capital to developed markets such as the U.S., China, Taiwan, and Japan, which offer stability and stronger economic prospects in the current environment.

For Indian investors, this trend signals the importance of global diversification. While the domestic market has strong long-term potential, short-term uncertainties and FII outflows can create pressure on Indian equities. By allocating a portion of their portfolio to international markets, investors can mitigate risks, gain exposure to high-growth sectors like technology and artificial intelligence, and take advantage of opportunities in economies where foreign investors are currently focusing.

Having said that, global markets, particularly the U.S. and European indices, have shown resilience despite global economic concerns. The S&P 500 and Dow Jones have fared well when compared to many emerging markets in recent quarters, fueled by strong corporate earnings and the continued growth of sectors like technology, artificial intelligence, and electric vehicles.

Divergence in performance between Indian equity indices (BSE Sensex - TRI and Nifty 500 - TRI) and major U.S. indices (S&P 500 and Dow Jones) over the past year.

While Indian indices showed strong momentum until late 2024, they have faced a sharp decline since early 2025. In contrast, the S&P 500 and Dow Jones have demonstrated relative resilience, maintained an upward trajectory and shown stability despite global economic uncertainties.

The outperformance of U.S. indices highlights the strength of their technology, healthcare, and financial sectors, which continues to attract capital inflows. This suggests that while domestic markets have been struggling due to macroeconomic headwinds, FIIs outflows, and policy uncertainties - developed markets, particularly the U.S., have remained attractive investment avenues.

This brings us down to conclusion that investing in international mutual funds passively could give Indian investors access to these high-growth sectors, which are not as well-represented in the domestic market. Amidst heightened volatility, global exposure could help investors reduce dependence on local market cycles, and gain access to high-growth opportunities in developed economies.

Moreover, the rupee's long-term depreciation trend against the U.S. dollar makes global investments an attractive hedge. Historically, currency depreciation has enhanced returns for Indian investors holding international assets.

With India's trade deficit widening and global crude oil prices fluctuating, there is a possibility of further rupee weakness, making foreign investments a strategic move.

From an investment opportunity standpoint, the Indian stock market is heavily dominated by banking, IT, and FMCG sectors, while cutting-edge industries like artificial intelligence (AI), electric vehicles (EVs), semiconductor technology, and biotechnology have a greater presence in global markets.

For instance, the Nasdaq 100 and S&P 500 host some of the world's largest technology and innovation-driven companies, including Apple, Microsoft, Tesla, and Nvidia. Given the continued expansion of these sectors, international exposure could add long-term growth potential to an investor's portfolio.

Given the current market volatility and economic uncertainties, having a well-diversified portfolio with global exposure makes strategic sense. However, instead of making aggressive one-time investments, a systematic approach, such as SIPs in global mutual funds, ETFs, or index funds, could help manage risks in a cost-effective way.

Moreover, investors should focus on long-term fundamentals rather than reacting to short-term market movements.

To summarise...

In times of uncertainty, sticking to a single market could be risky. The recent volatility in Indian equities has shown that even a strong economy like India is not immune to global and domestic pressures. By adding global exposure, investors can spread their risks, access industries that are shaping the future, and cushion their portfolios against local market downturns.

The opportunity to invest in leading global companies and emerging sectors could be a game-changer for those willing to look beyond traditional investments.

As the world economy evolves, Indian investors with a balanced mix of domestic and international assets will be better positioned for sustained growth and financial stability.

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MITALI DHOKE is a Research Analyst at PersonalFN. She is an MBA (Finance) and a post-graduate in commerce (M. Com). She focuses primarily on covering articles around mutual funds including NFOs, financial planning and fixed-income products. Mitali holds an overall experience of 4 years in the financial services industry.
She also actively contributes towards content creation for PersonalFN’s social media platforms in the endeavour to educate investors and enhance their financial knowledge.
 

Disclaimer: Investment in securities market are subject to market risks, read all the related documents carefully before investing.
This article is for information purposes only and is not meant to influence your investment decisions. It should not be treated as a mutual fund recommendation or advice to make an investment decision in the above-mentioned schemes.