Dollar funds deliver as rupee falls

With rupee touching 10-month low, international mutual fund investors see outsize returns

The rupee hitting a 10-month low has foreign institutional investors on edge but one set of investors are smiling from ear to ear.

Those investing in international mutual fund (MF) schemes whose underlying securities are in dollars have seen outsize returns. The rupee’s fall has resulted in these funds giving higher returns than even the benchmark indices of the markets they invest in, though these have also been hitting new highs.  

For example, the Motilal Oswal MOSt Shares Nasdaq-100 ETF has generated returns of 7.12 per cent compared to a 4.31 per cent return in its benchmark index. The DSP BlackRock US Flexible Equity Fund gave 6.96 per cent compared to 3.74 per cent by the Russell 1000 Index, against which it measures its performance, according to data from mutual fund tracker Value Research.

Similarly, ICICI Prudential US Bluechip Equity generated returns of 6.26 per cent as opposed to a 3.91 per cent rise in the S&P 500. Franklin Templeton’s FT India Feeder Franklin US Opportunities Fund gave returns of 6.15 per cent compared to 3.74 per cent in its benchmark index.

The rupee has depreciated four per cent against the dollar this month. It fell further today, to cross the Rs 56 mark and hit a 10-month low. It closed at Rs 56.17.  

Dhruva Chatterji, senior investment consultant, India, at Morningstar Investment Management, which provides research on MFs, suggests  while currency moves will have an impact on returns, not all international schemes will do as well. “It will also depend on the fundamentals of the underlying theme. In the current environment, a fund focused on emerging markets will not do as well as one which is picking US stocks,” he said.

“Most of these funds are positively benefited, especially those focused on developed markets. Emerging market-focused funds have not done as well,” agreed Gopal Agrawal, chief investment officer at Mirae Asset Global Investments (India).

Funds focused on Brazil and other emerging markets have given returns of less than two per cent, according to Value Research data.

When investors park money in such international funds, their rupee investments are converted into the currency of the country in which the funds invest.

Thus, these funds are affected not only by the movement of the securities they invest in but also by how the currency moves. In the case of US-focused funds, the more the rupee falls, the more their investments rise in value.

The rupee returns alone overshadowed those of the Sensex and Nifty, taken to be broadly representative of Indian markets. Their returns during the period were around three per cent.

Dhirendra Kumar, chief executive officer of Value Research, notes a currency can swing both ways. “A depreciating rupee enhances their returns, which can be seen in their NAVs (net asset values). But what is an advantage today might turn into a disadvantage tomorrow. One needs to evaluate the fundamental story for these funds,” he said.
BETTING ON THE GREENBACK

• Rupee investments are converted to dollars before deployment
• Falling rupee acts as a tailwind for such investments
• Rupee has depreciated four per cent this month
• US markets have already been hitting new highs
• Falling rupee adds to returns of funds investing in the US