In the last few months, we have read a great deal about the currency woes of Indian corporates, with dozens of companies confessing to losses suffered due to inept management of forex issues. However, with the Indian investor having unprecedented access to foreign investments, currency woes might actually mean profits.
For individuals in India, investing abroad was first permitted in the 2004 budget. For most of the time since then, Indian markets were outperforming international markets and so interest in investing abroad was low.
In any case, the practical option to invest abroad is going through mutual funds. Till about a year back there were few options.
However, this has changed. Now, there are at least 15 funds that have a mandate to invest abroad. Within this number, there are plenty of variations available today. Among these, there are general global funds as well as those focused on specific regions like Latin America or China. There are diversified funds as well as sectoral ones. And there are some debt funds too.
More and more Indians are investing abroad and as choices grow and the idea becomes more acceptable, it is inevitable that the number will only increase.
What will also grow are unexpected twists to the basic investment returns by currency movements. In the last two-and-a-half years, the rupee has first gained almost 20 per cent over the US dollar and then, lost about 16 per cent.
When you juxtapose this movement with the returns that your international investments are earning, it leads to a rather large modification to the original returns (being offered abroad).
The trouble is that for the ordinary retail investor, this adds to the uncertainty that all investments carry. Not only does the investor need to have a view on which part of the world to invest, but also how the currency of that region will move vis-a-vis the Indian rupee. And I think that's a bit too much to ask of the investor.
Of course, while such moves are completely unpredictable, they can be positive or negative depending on various economic factors.
One good example of this is Franklin India International Bond Fund, which invests its entire assets in a matching bond fund, run by the parent company in the US. Since this is a bond fund, its real returns have proven to be a fraction of the currency impact.
The mother fund in the last three years delivered an annual return of just 4.37 per cent, which is better than the Indian version which yielded 2.91 per cent. Over the past five years, the mother fund gave 4.24 per cent, but feeder fund returned 1.98 per cent - all because of a rising rupee.
If we look at just this year, the situation is completely reversed. From the start of the year till September 10, the fund returned an amazing 15.5 per cent, the best returns of any Indian mutual fund during this period. Of course, these returns have nothing to do with the actual investment.
The underlying US treasuries fund is so sluggish that for all practical purposes, such funds are a way of investing in the US dollar. For foreign equity funds, the effect may be smaller but still significant.
The ideal solution to this is hedging. Funds that invest abroad should be structured to hedge against currency movements so that they can deliver the real returns of the underlying investments to investors.
However, hedging would imply additional cost in certain circumstances. And many investors may not want to bear that cost. In any case, this is one more thing for the investor to worry about.
The writer is CEO, Value Research