The rupee has been on a free fall since January this year. Though it has gained tactical strength, it is quite likely that there is more pain in the offing, especially, with the Fed on an interest hiking spree to control inflation. We have always been taught, “Time and tide wait for none”. In the current context, let us extrapolate this to the market saying, “Time, tide and market wait for none”.
Many investors in the past few months have rejigged their portfolios to reduce their exposure to stocks that suffered the most while hiking their investments in stocks that have well responded to inflation. Considering how the Fed has been struggling to contain the all-time high inflationary rates, investors may consider parking their money in offshore funds to escape the bearish brunt of the Indian stock market.
Investing in foreign lands
Investors who had parked their money in Indian equities have faced tremendous erosion of losses over the past many months, thus, prompting many of them to park money in the US government bonds that are relatively safer. Indians investing in foreign stocks is not new. Many Indians have shown greater interest in foreign stocks and have invested heavily in them.
One reason can be the urge to diversify the portfolio by ensuring a mix of both Indian and foreign equities. This explains why many park their money in Indian asset management companies that invest in global funds. The US market does not move in exact correlation with the Indian market, thus, leaving very little room for volatility. Also, since foreign stocks in any particular sector may not behave similar to the corresponding sectors in the Indian stock markets, thus, lending investors the much-needed respite.
Viral Bhatt, Founder of Money Mantra says, “In my opinion investors should not invest more than 10% allocation out of overall allocation towards equity and also in my view investors should also diversify within the global diversification (not to invest everything in one country stocks or fund).”
Benefiting from the rupee depreciation
Similar to many sectoral and thematic funds in India, many international funds also focus on certain sectors and themes that they invest in. Investors depending on their financial goals and risk appetite can park their money in country-specific international funds. They can then redeem their investments in international funds in Indian rupees depending on how far the rupee has fallen. The current rupee depreciation against the US dollar will help many gain on the sale of these stocks and funds.
All kinds of investments have their downside as well, which means that you must not invest too heavily in the global marketplace. Deepali Sen, Founder Partner, Srujan Financial Services LLP says, “One of the key risks of investing outside India is the currency movement. With the rupee depreciating vs the US dollar, the clients end up benefiting from overall returns. For investors in global funds, the returns are made up of two key components, the underlying returns of the securities/stocks invested and the additional returns owing to rupee depreciation.”
Explaining the tax implications of investments in government securities, Kumarpal Jain, AVP –Product, Fintso explains, “The dividend income earned by an individual gets added to overall income, and the investor receives foreign credit to the extent of tax deducted by the US company. However, for capital gain taxation, shares held for more than 24 months are considered long-term, and a tax of 20 per cent is applicable. For investments held for less than 24 months, ‘short-term capital gain from the sale of foreign stocks is added to the total income and taxed at per the individuals’ tax slab rate’.”
Pratibha Girish, Founder, Finwise Personal Finance Solutions says, “While diversifying investments globally is essential, accessing these stocks is not necessarily easy. One needs to register with platforms and track performance separately. Investing through Indian funds is simpler on both fronts.”
When should you invest internationally?
Many investors are often curious about why many people diversity their equity portfolios with international funds. The idea is how they see their expenses in future. For example, investors looking to spend a few years of their lives in the US may consider parking their earnings in US funds to earn returns in dollars in the future. Alternatively, investors looking to send their children abroad for foreign education may consider parking a small percentage of their earnings in these global funds so that they can redeem the same in dollars for their wards to pay off their education bills and meet additional expenses.
Basant Maheshwari, Co-Founder & Partner of Basant Maheshwari Wealth Advisers LLP says, “The dollar appreciates by around 3.5 per cent each year against the rupee. Having dollar-denominated assets serves a good purpose in case you are looking to send your child for further education abroad. However, stocks in foreign countries are not easy to track. The best way to go about it is by buying a mutual fund that tracks the S&P 500 index fund or a Nasdaq 100. With so much technology and innovation happening in the US, these indices are a good way to participate in the global tech boom and also de-risk yourself from an India-specific event.”
Gurmeet Chadha, Managing Partner & Chief Investment Officer of Complete Circle Wealth explains, “International or offshore funds invest in equities of a foreign country or region either directly or have the option to invest in other funds in those markets. The latter way is called a feeder route and is in the form of a fund of funds. Apart from market risks, they carry currency risks."
“Let’s say you invested in Kotak Nasdaq 100 FOF. Now let’s say that the rupee depreciated five per cent against the dollar in July and Nasdaq is also up five per cent, it means you will get more rupees for every dollar invested, and your NAV could be higher (5+5 minus expense and tracking error). On the other hand, if the rupee appreciates against the dollar, you get fewer rupees for every dollar invested. However, currency can move either way and can’t be the only criteria for investing. The primary criteria are diversification and low correlation,” Chadha added.
Just like a temporary change in place can boost your chances of professional and personal growth, so can diversification help you not only earn more money but shield you against the effect of devalued currency stemming from inflation. Rebalancing the portfolio regularly by allocating a part of your earnings in US dollars as opposed to Indian currency will help earn better returns.
Suresh Sadagopan, Managing Director & Principal Officer of Ladder7 Wealth Planners Pvt Ltd issues a caveat here. Sadagopan says, “The money invested and the returns get amplified when Rupee depreciates and one will be able to get more just due to this. But if the rupee appreciates, the opposite can happen and one needs to be prepared for that too.”
Asset class matters, so you must be aware of what kinds of investments you have opted for, be it equities, bonds or government securities.
Bhatt says, “It depends on the needs, wants and aspirations of investors. First, investors have to focus on financial goals, what he or she wants to achieve with the investments.”
The depreciating value of the Indian rupee will wipe off earnings from Indian equity funds. This is because foreign institutional investors (FIIs) will exit the Indian stock markets to escape volatility and seek cover in US government bonds. Those who had invested in US dollars will benefit the most.