Stick to 5-10% allocation on foreign funds

While currency fluctuation will lead to higher returns, look at these only as a diversification strategy

When the rupee slipped to 65 a dollar last week, it hit a two-year low. While a falling rupee unnerves Indian borrowers, especially companies that have to service dollar-denominated loans, parents who also the education costs of their children studying abroad, too, feel the pinch. According to Bloomberg data, compiled by the Business Standard Research Bureau, between July 17 and August 17, the rupee slipped 2.9 per cent. Since July 2014, there has been a drop of 7.5 per cent.

The good news is that international funds — mutual fund schemes that invest abroad - see a change in their fortunes because a falling rupee translates into rising returns, much like gold. “If you are an equity investor, then overseas funds are a good way to diversify. One should look to diversify in both different geographies and in different industries. Don’t look to time the market by investing on the basis of currency fluctuation,” says Nimesh Shah, managing director and CEO, ICICI Prudential Asset Management.

Existing investors in international funds will gain, since the net asset value will increase. But, even those looking to enter now can expect to gain, as the rupee will depreciate. “While the two per cent depreciation in a month might be an aberration, the rupee is a high interest currency and will depreciate further. Hence, it is good to have some dollar asset in your portfolio,” says Feroze Azeez, deputy CEO of Anand Rathi Private Wealth Management.

Don’t go overboard. “With regard to the performance of equity markets, India is currently one of the favourite investment destinations due to the fall in crude prices, commodity prices and expectations of impactful policy measures. While currency depreciation will partly augment the returns from overseas investments, the investment objective should be first linked to the growth in the underlying asset, says Abhishake Mathur, senior vice-president (financial planning and customer service) at ICICI Securities.

It is advisable to have 5-10 per cent of your portfolio in international funds more as a diversification strategy and not as a core investment strategy. These funds can give you returns if rupee depreciates and can hold investment value if there is a specific risk to Indian markets.

Among international funds, there are funds that are US specific and some that invest in all developed markets such as the US, the UK and Europe. Of these, US-centric funds are better placed, because the US markets have seen some correction in the past few months, says Azeez. Although the rupee has depreciated by almost two per cent since the beginning of the month, this will not automatically translate into a two per cent increase in returns. “Returns will be calculated after taking into account transaction cost, conversion cost and tax. So, a fall in the rupee does not mean a corresponding rise in the returns of the investments,” says Mathur.

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