The economic growth story has resulted in unprecedented levels of foreign investments coming into the country. To manage the high inflow of dollars, the Reserve Bank of India [Get Quote] for one has had to take measures to balance the situation. One such measure has been to loosen the screws on forex outflows in a calibrated manner for both corporates and individuals.

The limit for individuals now stands at $200,000, up from $100,000 till recently. But ask any Indian investor whether they are gung-ho and most probably the answer will not a big no. The reason: Indian markets are generating better returns. But there could be a case for investing abroad. Here's why.

Diversification: All of us would like to be present in the best performing asset class (whether it is equity, debt, art, property or others) at all times. But, very few, if any for that matter, have the insight to position themselves rightly in the market always. The more common stories come from people who join the bandwagon much after a rally is under way. And then move out much after the downside has begun.

That is why a portfolio approach is advised to investors. And when it comes to balancing your portfolio with markets abroad, one can look at different countries, blocs (BRIC countries) or regions (the European Union) that will outperform others, either because their economies are doing better than others or simply because, big investors have still not made an entry into these areas. Earlier, Indian investors did not have the luxury of diversifying geographically. But now that we have the option, it should be judiciously used.

Correlation: This refers to the numerical relationship between two variables or between two markets and determines the extent to which the movement in one market will determine the movement in another market.  The comparison can be taken between the US market (through the Russell 3000 Index) with several other markets, including India. The Indian market has a correlation of 0.63 with the US market which is not a very high figure. (Generally, a correlation co-efficient of 0.80 or above is considered to be highly correlated.)

While markets are generally positively correlated, it has been observed that India has a lower correlation with certain European and Latin American countries as compared with other Asian markets. If one looks at composite returns (nominal local currency returns + currency fluctuations) of a random sample of different indices (See Comparative Returns), one can see that the Indian and Brazilian markets are giving almost equal returns. However, for proper diversification, one should invest in markets with low correlation with the Sensex. 

Vehicles for diversification: Several fund houses such as Fidelity, Templeton and ICICI [Get Quote] Prudential have floated funds, which invest in various parts of the globe. This is either done directly by them or through the feeder fund route.

Foreign brokerage houses such as E*Trade permit foreigners to open stock trading and futures trading accounts for trading in specified markets such as the New York Stock Exchange and the Chicago Board Of Trading.

Some real estate investment trusts in countries like Australia offer units for sale to foreigners. Indians can invest in them in order to diversify geographically and also into a new asset class such as real estate.

However, before you jump into this bandwagon, there are a few points to remember.

Currency risk: The Indian rupee is strengthening rapidly. In such a scenario all investments denominated in foreign currencies will be less attractive as the rupee denominated returns will fall.    

Regulatory risk: Take care to ensure that one's investments are made in countries where property rights are respected and protected by a robust regulatory framework. For instance, Russia is an attractive market but there have been cases where the government has summarily taken over private assets.

However, in spite of the positives, there are hardly any vehicles available for the retail investor to go for such options at present except for the international funds that AMCs have launched. A few foreign banks offer globalised investment options to its high net worth clients. For the retail investor, the best way is to approach foreign brokerages such as E*Trade and Ameritrade directly and open trading accounts with them. The process is a bit slow as these organisations have to send you physical documents and then, you have to fill and send them back.

In recent times, a large number of firms based in Singapore, Switzerland, Australia and the UK have been sending feelers to independent financial advisors seeking tie-ups and referral arrangements. And once the tie-ups begin to firm up, there would be more options for the retail investor.

The writer is a certified financial planner