Limit your exposure to dollar-linked instruments

While rupee has weakened against the dollar, outlook on instruments such as gold is not strong

A falling rupee is bad news for the stock market and economy, as it indicates more outflows from India. But for investors in gold, mutual funds investing in the US market and stocks of certain sectors like information technology and pharmaceuticals stand to gain from this situation.

For example, when the BSE's Sensex witnessed the worst single-day fall in 16 months on December 16, the rupee fell sharply to 63.53 against dollar.

The declining currency, on the other hand, aided gold equity traded funds (ETFs). They have gained the most, with a category average of around 1.11 per cent in the past fortnight, followed by international funds (category average 0.59 per cent), banking (category average of 0.45 per cent) and technology funds (0.01 per cent category average). Most equity funds in this period gave negative returns, with the CNX Nifty at -2.03 per cent and the S&P BSE Sensex at -2.18 per cent.



However, for certain instruments like gold, things can be completely different. When the dollar strengthens and the US economy is doing well, gold usually doesn't show an upward  trend. In addition, gold and crude oil prices have a positive correlation. A fall in crude oil prices imply subdued inflationary conditions and, hence, a hedge, for the same is not required.  "We expect gold to correct after a slight rise," said Manoj Kumar Jain, president-commodities and forex, IndiaNivesh Commodities. So, the best strategy for gold would be to wait till things get clearer.

Agrees Kishore Narne, associate director and head, commodity and currency, Motilal Oswal Commodities: "The US has done away with quantitative easing, that has ended excess liquidity. Interest rates are expected to rise and that will end the era of cheap money. These two factors will further drive down gold prices."

As far as international funds that focus on the US go, their performance has improved in recent weeks. If you look at the three-month period, PineBridge India US Equity Standard Fund ranks second at 10 per cent returns. The third highest return is of Motilal Oswal's MOSt Shares NASDAQ - 100 ETF Fund at 9.88 per cent. JP Morgan US Value Equity Off-shore Fund - Regular Plan comes fourth with 9.41 per cent returns. At fifth is DSP BlackRock US Flexible Equity Fund with 8.24 returns.



These funds are means to diversify. The allocation to such specialised funds should not be over five per cent of the portfolio. As the US economy looks stable, investment experts said the existing investors don't need to tinker with these funds. They can continue to invest systematically in line with the allocation. For the first-time investor, these investments are not advisable.

Taking a call on sectors with considerable income from the US is slightly trickier. With most of the leading diversified funds have considerable exposure in stocks like Infosys, Tata Consultancy Services, Wipro, Sun Pharma and others, buying these stocks or sector funds separately would lead to excess concentration of such stocks in the portfolio. What investors need to be careful about is that these stocks, being part of the defense sector, have done very well for some time. So, their returns could be capped.