As the rupee has depreciated over 7% against the dollar since January and is likely to fall further—it breached the 80-mark for the first time last Tuesday—investors should take a tactical call on hiking or reducing exposure to certain sectors and stocks and put a part of their portfolio in global markets to offset the effects of the falling currency.
Most currencies have depreciated against the dollar due to aggressive rate hikes and quantitative tightening by the US Federal Reserve. At home, the Reserve Bank of India has been supporting the currency by selling dollars from its reserves. In fact, the Fed’s single minded pursuit is to control CPI inflation which is running at a four-decade high of 9.10%.
The depreciation of the rupee erodes the value of Indian equity investments as foreign institutional investors (FIIs) exit the Indian stock markets for the relatively safer US government bonds. Archit Gupta, founder and CEO, Clear, a fintech SaaS company, says investors can diversify their equity portfolio by investing in global funds via Indian equity mutual funds. “International funds have a low correlation with the Indian equity markets. They do not move in the same way as the Indian stock markets, thereby lowering the volatility in your portfolio,” he says.
Within international funds there are thematic funds that have a theme-based investment strategy. Then there are country-specific international funds that focus on a specific country or region, such as the US or the Asian markets. An investor can redeem the investment in international fund in rupees when he needs the money. Moreover, the rupee depreciation against the US dollar will enhance the returns from international funds.
Raj Khosla, founder and MD, MyMoneyMantra.com, says global diversification is a good idea, but one should not overdo it. “Keep only about 10% of your portfolio in international stocks. Also, given the complexity of the tax compliance for foreign assets, it is better to take this global exposure through the international funds and ETFs launched by Indian fund houses,” he says.
Ideally, an investor should diversify his equity portfolio with international funds if he expects to incur expenses in US dollars in the future. “For instance, suppose you plan to send your children to the US for higher education, you could consider international funds. As these mutual funds invest in foreign currency-denominated stocks listed on stock exchanges abroad, they serve as a hedge against rupee depreciation for Indian investors,” says Gupta.
Over the last decade, investors have started diversifying by investing in global markets which has covered 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 the asset class,” says Vijay Singhania, chairman, TradeSmart, a discount brokerage firm .
As the value of the rupee depreciates further, the value of an investor’s Indian stock market portfolio falls as well because all investments are made in rupee. As a result, if one invests in the dollar, the value of his investment rises. Raj Gandhi, co-founder, DollarBull, a digital fintech platform, says even if the portfolio remains static, the investments expand when the US dollar rises. “As a result, rebalancing the portfolio and allocating a chunk of it to invest in US dollars will yield a better return than investing in Indian rupees, at least to help realise global goals,” he says.
Tweak domestic investments
An investor can take a tactical call on hiking or reducing 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 top companies in IT services, pharma, speciality chemicals. On the other hand, import-dependent sectors and stocks will face rough weather. Paints, consumer durables and electronics could see their bottom lines erode,” says Khosla.
For fixed income investors, most of the rate hikes are factored in the bond market. Murthy Nagarajan, head, fixed income, Tata Mutual Fund, says investors with a horizon of one year and above may look at short term bond funds. “Investors with one month horizon may invest in ultra-short term bond fund, one to two months in money market fund, three months in low duration, six months in floating rate funds,” he says.
Hedge your bets
A falling rupee erodes the value of Indian equity funds as FIIs exit Indian stock markets for US government bonds
Export-oriented sectors and companies will benefit from the rise in the dollar
Allocating a chunk of your portfolio to invest in US dollars will yield a better return than investing in Indian rupees
For fixed income investors, most of the rate hikes are factored in the bond market