Should You Invest In International Funds To Benefit From Weak Rupee?   Oct 01, 2018


If you were wondering how the depreciation of the Indian Rupee by more than 13% in the last 8-9 months has affected most people, take a look at these two contrasting cases. 

Anuj and Anjali are planning an overseas vacation.

But the fall in Indian Rupee has upset their travel budget to some extent.

Last December,the same trip was priced at approximately Rs 3.4 lakh. Now, the cost is upwards of Rs 4 lakh.

In Pratik’s case, who is an NRI, he is extremely delighted about the falling Rupee.

You see, he sends Rs 1 lakh every month to his family living in India. The Rupee depreciation is actually saving him a few dollars every month.

You change your role and the same event looks so different, isn’t it?

Now take the example of investors.

If you are a foreign investor investing in India, year 2018 has been a dreadful year. Let alone the losses on individual stocks, the Dollar appreciation would have eroded your investments by around 13% so far this year.

And, an Indian investor who has invested in a U.S. centric fund at the beginning of 2018 would have gained nearly 20% returns so far. The S&P 500 is up around 7% in 2018. But, the biggest gains would come from the Rupee depreciation.

Now many investors are asking a question.

Is it a right time to invest in international funds?

Fall in the Rupee that we are witnessing now has comeas a rude shock to many Indian market participants. When the markets were riding high a year ago, nobody could have anticipated the nose-dive of the Indian currency we are presently talking about.

The jump in crude oil by more than 50% in the last one year hasseverely dented the prospects of Indian economy.

Cumulatively, the falling Rupee, sticky imports, weak exports, and rebounding blows of demonetisation and the implementation of Goods and Services Tax (GST) have affected India’s growth prospects negatively. And these factors consequently affect the Indian stocks markets.

Rising inflation and rising interest rates will make their journey an up-hill challenge.

In recent times, a dramatic fall in Non-Banking Finance Companies (NBFCs) has made Indian investors nervous and investments of many mutual fund investors initiatedover last 12-18 months are fetching negative returns.

Many experts believe the Indian Rupee is still overvalued. And if Federal Reserve (Fed) in the U.S. continues to raise interest rates and crude oil prices don’t cool off, the interest rates in India will increase as well. Inflation is a bigger threat to your investments today than what it was a couple of years ago.

[Read: Has The Rupee Really Depreciated The Way It Looks? Know Here… ]

Under such circumstances, the Indian Rupee and Indian equities might witness steeper falls.

Will international funds be a viable alternative to domestic mutual fund schemes?

The answer is no!

Surprised? Well, let's understand that…

It’s not an “either/or” choice between Indian mutual fund schemes and international funds.

It’s more about diversification.

Do you have adequate exposure to Indian markets?

If yes, then you may invest lessthan 10% of your equity assets in international funds.

But, be very cautious and take stock of the factors that will affect your investments in the international funds negatively.

Market co-relation

As per the Economic Times dated May 28, 2018, the weighted average co-relation of Indian Rupee, bonds, and equities with those of other major global economies fell to 0.32 in April 2018. In fact, it’s 10-year low was 0.29in November 2017. It’s noteworthy that in 2010 this correlation was high at 0.68.

What this means is, Indian markets haven’t been following the global market movements lately. So if the global markets rise, the Indian markets willnot necessarily participate to the same extent. Similarly, if global markets fall, the Indian markets aren’t likely to mirror this effect.

So do you want to extrapolate this co-relation to make a case for international funds?

There’s a danger though. Here’s why…

Past observations reveal, the market co-relation returns to the mean (average point) during difficult market phases. For example, the financial crisis of 2008 created havoc across global markets, though the problems related majorly to the American sub-prime mortgages. The contagion didn’t spare any major global market. And remember when sovereign debt crisis in the Europe emerged? It affected the majority of global markets.

Now that trade wars and geopolitical risks are polarizing nations, the possibility of global economic upheaval can’t be ruled out completely.

In layman terms, no market across the globe is immune to any major shock that affects the overall economic landscape of major global economies.

Under such circumstances, how an international fund will help you safeguard your portfolio?

Investing in international funds can expose you to several risks which include:

  • Country specific macro-economic risk

  • Currency risk

  • Regulation risk

  • Geopolitical risk

[Read: 5 points you must know before investing in global funds]

If you are investing outside India at present, you are betting on two factors

  1. Global markets will outperform Indian markets

  2. Currency-adjusted returns could be positive for Indian investors if they invest in international funds

You can’t take both these factors for granted.

Over the last few months, other Emerging Markets (EMs) have fallen more than Indian markets in Dollar terms, reflecting the resilient outperformance of Indian markets. This has led many pandits and investors to believe that when other emerging markets recover, they will outperform the Indian markets.

What if economic growth in India picks up unexpectedly?

After all, it’s been 10 years since we witnessed a capex boom in India. This is perfectly possible that we might experience a capex-lead boom in India at a time when the capex cycle in major economies of the globe has peaked out already.The low market co-relation quotient need not work against India’s potential just because its currency has depreciated 13%. 

The reasons are fluid.

Crude oil prices might fall.

Inflation might not rise as much as expected.

Indian export recover fast thereby propping India’s deteriorating current account position.

Consider this too

If contrary to predictions\expectations, if the Indian Rupee stabilises at itscurrent level and starts appreciating gradually for any unforeseen reason, your investment in international funds will make a dent in your portfolio.

Non-conducive taxation environment

Any equity mutual fund that invests less than 65% of its assets in Indian equities doesn’t classifyas an equity fund for taxation purpose. Therefore, if you invest in an international fund, investing more than 35% of its assets abroad, you might lose the taxation benefits.

If you sell your investments within three years, you will end up paying short-term capital gains tax (STCG) as per your income tax slab. If you hold the investments for more than three years, you will be able to claim the indexation benefits.

In this case, the crucial question is can you take a call on currency movements over three years?

If you invest in an international fund investing 65% of its assets in India to qualify as an equity fund in India, it will defeat the purpose of diversification.

Verdict

You may invest in international funds only if you have no other investment optionin India. Only a handful of investors will meet this criterion.

Are domestic diversified equity funds a bad deal?

Certainly not!

If you believe the Indian economy has a bright future, you should invest in India.

Moreover, invest in mutual funds depending on your financial goals, risk appetite, and investment horizon. Shift your focus from macroeconomic trends such as market correlation and Rupee depreciation among others. Simply because,you can’t accurately time the markets.

When you invest as per your personalised asset allocation, you will tend to make better financial decisions.

Is stock market volatility is deterring you from investing in India-focused domestic mutual funds?

You can invest in equity mutual funds through Systematic Investment Plan (SIP) route to take advantage of rupee-cost averaging.

That being said, the selection of a mutual fund is equally important.

Want to learn how to select winning mutual funds? Download and read PersonalFN’s guide: 10 Steps To Select Winning Mutual Funds. This guide is a great valuable resource.

fs-investment

Editor’s Note

Want to build a SOLID mutual fund portfolio based on your risk profile and investment time horizon? 

But don’t have time and skills to select worthy mutual fund schemes?

Connect with us. We have the expertise to create a winning portfolio.

PersonalFN’s flagship mutual fund research service FundSelect Plus is the answer!

You get access to PersonalFN’s 7 High-Performing, Time-Tested Readymade Portfolios offered under FundSelect Plus. These portfolios are backed by decade-long market-beating track record.



Add Comments