Check currency risks in overseas MFs
Estimating the currency risks even while investing abroad via MFs can become pretty complicated.
By Sumit Gulati, TNN |
The option to invest abroad through a trusted local mutual fund can indeed be an exciting opportunity and even a wise investment decision. But, before you sign the cheque for that fund which invests in Microsoft's stock, consider realistically , the role currency movements can play in influencing your total rupee return. The equation can go way beyond just simply predicting the movement of the dollar.
What it does
Just consider the case of a foreign investor bringing in money — dollars in this case – into India. Every dollar that is brought in gets converted into rupees and is invested. When the money is to be taken out of the country, the investor sells the rupee holdings and converts the proceeds into dollars.
If the rupee appreciates, i.e., if less rupees are needed to buy a dollar, the foreign investor's profits get a boost. This is because the same amount of rupees fetch him more dollars.
The same principle applies to your investments too. The only difference is that if you invest in a fund that invests outside, India the reverse of what applies to the foreign investor would apply. Your investments outside India (made in dollars) would get you additional profits if the rupee depreciates against the dollar. In the last few months, however, the rupee has appreciated against the dollar.
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To understand this better, take the case of Templeton's Franklin India International Fund. This scheme collects money in rupees from local investors and invests it in the Franklin US Government Fund. This US Government Fund invests in securities issued/backed by the US government. The return generated by the Franklin US government Fund and the rupee-dollar movement for different time periods is given in the chart alongside. By itself, over the one year period, the US Government Fund has given returns that match those generated by local debt funds. However, the appreciation of the rupee over the same period has completely negated the positive returns of that fund. But, if the rupee begins to depreciate once more, the magnitude of depreciation will get added to the returns generated by the fund -whether the US Government Fund will continue to as well is a matter on which a call too will need to be taken.
Things can become more complicated if multiple currencies are involved. Principal PNB's Global Opportunities Fund illustrates this well. This fund, like the Franklin International Fund, invests the money collected locally in rupees in a fund managed by its foreign parent - the PGIF Emerging Market Fund. To do so, it converts the money you invested in rupees to dollars and uses the converted money to buy units in PGIF Emerging market Fund. PGIF, in turn, uses the dollars to buy stocks across a number of countries and therefore across a number of currencies.
So, any investment in this fund has to take into account not only the rupee-dollar conversion rate but also the relative movement of the dollar vis-à-vis the currency of each country the PGIF fund invests in. It is this relative movement of the dollar versus the other currencies that will determine what the final NAV of the PGIF fund in terms of dollars. Then, the rupee-dollar rate comes into play as Global Opportunities Fund will have to convert dollars into rupees to redeem units.
Here's the take-away. Investing outside through mutual funds also involves currency risks. Your rupee returns can get positively or negatively impacted depending upon the movement of the currency vis-à-vis the rupee. The risk can vary depending upon the number of currencies one gets exposed to and it may not always be a simple dollar-rupee play. While investment outside in multiple currencies diversifies currency risks, it also makes determining the net impact of the interplay of multiple currencies difficult to estimate.
sumit.gulati@timesgroup .com
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