Protect yourself against the rupee's fall

It hurts your finances if you aren't hedged adequately. Here's how to go about it

With the rupee hitting a new low almost every other day, Indians are likely to face a lot of pressure on their household budgets. The currency has tumbled Rs 56.42, a drop of 4.62 per cent, in the past month, implying to you have to pay more in rupees to buy the same amount of dollars.

It also threatens to disrupt your household finances if things get worse. For starters, imports get costlier as we pay more for products such as oil, gold, fertilisers, machines, personal computers and mobiles, among others.

All this tends to swell inflation, thus hurting household budgets. Your wallet will also shrink if you are planning a foreign tour or thinking of taking up educational courses abroad as these will be more expensive in Indian rupees. Says Sunil Mishra, CEO of Karvy Private Wealth: "For Indian residents, a fall in the rupee will hurt, as it tends to drive up inflation and increase rupee costs."

On the flipside, if you are earning in foreign currency, your dollar will fetch you more rupees. Thus this is good news for non-resident Indians who earn their incomes in dollars. If you have dollar-denominated assets, your returns would have got a little boost with the fall in the rupee. A lot of investors who have bought into international feeder funds or even gold have got a fillip in returns. Says Nishant Agarwal, senior director, Ask Wealth Advisors: "Even while the dollar assets have remained constant, the assets have yielded more as rupee returns have got a boost."

Likewise, Indian companies earning in foreign currency will see an increase in rupee profits, while importers will have to pay a bigger bill on their imports. Broadly, export-oriented companies tend to benefit from the rupee's fall.

So, how can you protect against the falling rupee? For Indian residents, ensure you have at least some exposure to overseas assets like mutual funds. Over the last few years, a host of feeder funds and international index-based exchange traded funds have made their debut in India. Depending on the outlook for some these countries, investors could do well to take an exposure to these funds. A host of these international funds have a minimum investment of just around Rs 5,000.

Experts say that 5-10 per cent of your portfolio could include international feeder funds and ETFs for retail investors. This also helps diversify across geographies or to guard against any other political risks that arise in different countries. Says Agarwal: "As an allocation strategy, one should always invest at least 10 per cent in overseas assets and reduce the geographic risks"

If the Indian economic environment worsens, Mishra would recommend a higher allocation to foreign assets. Says he: "If the outlook for Indian assets gets weaker in about six months, we would advise investors to increase their overseas allocation to around 15 per cent."

Diversify your stock holdings, too. If you have companies that are largely export-oriented in your portfolio, you could take advantage of a falling rupee as these companies begin to report higher profits and thus see an increase in their market value. On the other hand, you should weed out those companies that have higher foreign expenses or a large import bill from your portfolio, as this will hurt their domestic profitability.