Manage currency risk: opt for global funds to offset losses

With the rupiah depreciating more than 7% against the dollar since January and set to fall further – it broke the 80 mark for the first time last Tuesday – investors should make a tactical decision to rise or reduce exposure to certain sectors and stocks and place part of their portfolio in global markets to offset the effects of the currency decline.

Most currencies depreciated against the dollar due to aggressive rate hikes and quantitative tightening by the US Federal Reserve. At home, the Reserve Bank of India supported the currency by selling dollars from its reserves. In fact, the Fed’s sole objective is to control CPI inflation, which stands at 9.10%, its highest level in four decades.

Global Diversification
Rupee depreciation is eroding the value of Indian equity investments as foreign institutional investors (IFIs) leave Indian stock markets for relatively safer US government bonds. Archit Gupta, founder and CEO of Clear, a SaaS fintech company, says investors can diversify their stock portfolio by investing in global funds through Indian mutual funds. “International funds have a low correlation with Indian stock markets. They don’t move in the same way as Indian stock markets, which reduces volatility in your portfolio,” he says.

Within international funds, there are thematic funds which have a thematic investment strategy. Then there are country-specific international funds that focus on a specific country or region, such as the United States or Asian markets. An investor can redeem the investment in an international fund in rupees when he needs money. In addition, the depreciation of the rupee against the US dollar will improve the returns of international funds.

Raj Khosla, founder and managing director of MyMoneyMantra.com, says global diversification is a good idea, but don’t overdo it. “Keep only about 10% of your portfolio in international equities. Also, given the complexity of tax compliance of foreign assets, it is best to gain this global exposure through international funds and ETFs launched by Indian fund companies,” he says.

Ideally, an investor should diversify their stock portfolio with international funds if they expect to incur US dollar expenses in the future. “For example, suppose you plan to send your children to the United States for higher education, you might consider international funds. As these mutual funds invest in foreign currency denominated stocks listed on overseas exchanges, they serve as a hedge against rupiah depreciation for Indian investors,” says Gupta.

Over the past decade, investors have begun to diversify by investing in global markets, which has hedged them against currency risk. “If one is looking for diversification to protect against a depreciating currency, it is not only important to diversify in terms of geography but also asset class,” says Vijay Singhania, president of TradeSmart, a discount brokerage.

As the value of the rupee depreciates further, the value of an investor’s Indian stock portfolio also decreases as all investments are made in rupees. Therefore, if one invests in the dollar, the value of his investment increases. Raj Gandhi, co-founder of DollarBull, a digital fintech platform, says that while the wallet remains static, investments increase when the US dollar rises. “As a result, rebalancing the portfolio and allocating some of it to investing in US dollars will give a better return than investing in Indian rupees, at least to help achieve global targets,” he says.

Adjust domestic investments
An investor can take a tactical call to increase or decrease exposure to certain sectors and stocks. “In the coming months, export-oriented sectors and companies will obviously benefit from the rise in the dollar. Buy the best companies in computer services, pharmaceuticals, specialty chemicals. On the other hand, import-dependent sectors and stocks will face tough weather conditions. Paints, consumer durables and electronics could see their bottom lines erode,” Khosla says.

For bond investors, most rate increases are priced into the bond market. Murthy Nagarajan, head of fixed income, Tata Mutual Fund, says investors with a time horizon of one year and longer can consider short-term bond funds. “Investors with a one-month time horizon can invest in very short-term bond funds, one to two months in money market funds, three months in short-duration funds, six months in floating rate funds” , he said.

Protect your bets

Falling rupee erodes value of Indian equity funds as FIIs leave Indian stock markets for US government bonds
Exporting sectors and companies will benefit from the rise of the dollar
Allocating part of your portfolio to investing in US dollars will yield a better return than investing in Indian rupees
For bond investors, most rate hikes are priced into the bond market

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