You might be betting against Rupee by investing in mutual fund. Read to Know More
Are you investing in US or Other Global Market Funds from India? Then, you might be betting against Rupee. Let’s try to understand how and why this happens.
There are lot of mutual funds available in India, which can be used to invest in global markets, including US, Euro & other developed and developing markets.
In order to get geographical diversification in our portfolio, lot of us have invested in such global funds over a period of time.
But most investors forget one important aspect when they invest in such global funds, which is the impact forex rates can have on their portfolio.
Except for PPFC Fund, almost all other equity mutual funds in India that invests in global markets can be impacted by FOREX moves.
PPFC fund hedges against Forex Rate moves through Currency Contract. So it won’t have much impact. But due to this hedging, the cost of investing in the fund raises, that’s why PPFC fund has higher expense ration.
But if you take any other fund, they all have Currency Risk as they don’t hedge the forex moves.
In any case, all your Foreign investments are in fact subject to currency risks unless hedged. If you’re an Indian resident, your investments would be generally be in INR (Indian Rupee). But if you invest in global market funds, say US Market, they will convert the INR to USD and will invest the proceeds in the US Markets.
Likewise, when you redeem your investments, stocks will be sold in US markets and then the dollar received for the same will be converted in INR and the proceeds will be paid to you.
Do you see the problem here? We are exposing ourselves to USD-INR currency fluctuations here.
If INR appreciates against USD, then your investments in US would lose its market value, and show up as a loss in your portfolio.
Opposite is also true (that’s how risk works!) — if INR depreciates against USD, then your foreign holdings become more valuable, as it’s priced in INR.
These Forex movements would affect your portfolio greatly over time. So by investing in Global markets, in addition to market risks that come with every equity investments, you’d also be assuming one extra risk which would impact your portfolio.
So, how to choose the funds for investing in global markets?
Scenario 1:
If you think INR will deprecate against USD in long run, say USD-INR rate will hit 100 in the future, then you can go for the funds which doesn’t do the currency hedging.
Because,
· If you opt for funds without currency hedging, then, if INR depreciates as predicted, while redeeming the global funds, you will get additional amount over and above Market returns.
· But If you opt for funds with currency hedging, then, even if INR depreciates as predicted, while redeeming the global funds, you will only get the Market returns.
So it is better to go with funds without hedges if you think INR will depreciate over the longterm.
Scenario 2:
If you think INR will appreciate against USD in long run, say USD-INR rate will go towards 50–60 in the future, then you can go for the funds which do the currency hedging.
Because,
· If you opt for funds without currency hedging, then, if INR appreciate as predicted, while redeeming the global funds, you will get lesser or even negative returns even if the US Market had generated healthy returns. This is due to the currency risk.
· But If you opt for funds with currency hedging, then, even if INR appreciate as predicted, while redeeming the global funds, you will still get the actual Market returns.
So it is better to go with funds with hedges if you think INR will depreciate over the longterm.
Scenario 3:
If you think INR will stay around same levels, then it is better to go with funds which won’t do the hedging as hedging generally has additional costs associated with it.
Scenario 4:
If you cannot predict what would happen on the currency rate, in that case it is better to opt for funds which does the currency hedging, as the price you have to pay for judging it wrong is too high.
So, always keep these factors in mind while investing in global funds from India.
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