Summary of this article
Rupee underperformed Asian peers; down over 5 per cent on year
Globally diversified portfolio can help domestic investors hedge currency risk
At a time when experts have repeatedly stressed upon uncertainty in the macroeconomic environment and the rupee has been slipping to record lows, investors are looking at options to hedge their investment portfolios. The rupee, having fallen over 5 per cent during the year, has underperformed most of its Asian peers. While Indians are increasingly looking towards foreign trips or education, having a globally-diversified portfolio could help reduce the risks of a depreciating currency, according to experts.
Options For Resident Indians to Invest Abroad
For resident Indian investors, putting funds in a domestic mutual fund which invests in international funds is one option. Investors can also directly invest abroad through international mutual funds of exchange-traded funds (ETFs) listed on Indian stock exchanges. However, these fund options listed in India are often offered at a higher premium.
Additionally, with investment caps for mutual funds for overseas investments, the options of diversification could be constrained, experts say. Investors also have the option to invest in index funds which track broader global indices.
Besides, investors can also explore overseas mutual funds launched from GIFT City’s International Financial Service Centre (IFSC) or through direct stock purchases. For GIFT City investments, investors are not required to disclose assets under schedule foreign assets.
In recent times though, overseas investments through market-linked products have resulted in strong returns in recent times, but the appreciation was largely due to rallies in the US stock market on account of rise in technology stocks, coupled with a sharp depreciation in rupee. However, it is necessary for investors to explore a variety of options and diversify their portfolio to reduce concentration risk.
Experts suggest using the systematic investment plan (SIP) route to invest in foreign funds. Instead of putting in lump sum money, creating a monthly or a quarterly SIP, while also regularly reassigning the portfolio could help in reducing risks due to market volatility.
“Instead of investing through actively-managed funds, one can start with low-cost international ETF which track S&P 500 or other major global indices,” said Abhishek Kumar, a Securities and Exchange Board of India-registered investment advisor (Sebi RIA).
Going through the SIP route also provides an opportunity to create better long term returns with a lower expense ratio. “Investors should rebalance their portfolio at least twice a year to ensure it aligns with their risk profile and long-term financial goals. Just as rupee depreciation can add to returns, likewise rupee appreciation can reduce their returns so they should invest for the long term but review and rebalance their portfolio from time to time,” Kumar added.
Experts also say that understanding different tax implications depending on where the investor is putting their funds is equally important. Apart from certain specific tax rules applicable for Gift City, funds which are considered under Indian territory and does not require to be reported, other funds follow standard framework to calculate gains.
Gains on assets held for two years or less are treated as short-term capital gains (STCG), while the holdings beyond two years are considered long-term capital gains (LTCG), which are taxed at 12.5 per cent.
“If they are investing under the liberalised remittance scheme (LRS) route, then investors should understand that remittances above Rs 10 lakh annually incur 20 (per cent) tax collected at source (TCS) which can be adjusted later, and that they must ensure that they don’t exceed the $250,000 annual limit per financial year,” Kumar added.
