Ashish faces exchange rate risk as his earnings are in rupees and his expenses for the education of his children will be in dollars. Any increase in the rupee would work in his favour, while depreciation would increase the cost of education. Ashish may not be able to predict the direction of the exchange rate correctly due to global uncertainty. Therefore he should not try to guess the value of Rs. currency derivatives Not suitable for long term horizon of four to five years may be a risky option. If the rupee strengthens, then trying to give time to the market can create problems. There is a clear need for that, so hedging is a better option. He needs to think of ways to earn rupee to dollar income Investment,
International investment can be a good option. He may prefer to invest in dollar denominated bonds, ETFs and products. Foreign investment can provide a powerful buffer against the depreciation of the rupee. When the rupee slips against the currency of an international market where you have invested, you can get more rupees per unit of currency invested and the net asset value (NAV) goes up. Similarly, when the rupee rises, the NAV decreases. For example, an investment of $2,000 in a stock when $1 = Rs.80 would mean that the cost of its investment in the domestic currency is Rs.1,60,000. In such a scenario when the exchange rate rises to Rs 90, Ashish’s investment will be worth Rs 1,80,000. Thus, he would have made a profit of Rs 20,000 only from currency fluctuations.
You may also like to see Ashish International Fund He invest in global markets. He should be careful not to choose risky international investments. Some invest in certain countries or disciplines and may have equity and country risks. Some of these international funds are global in name only and can invest up to 65% in India to provide tax benefits to their investors. Some funds cost more and are also very small in size. Ashish should choose by focusing on his need to earn dollar income which will help in managing his currency risk.
Content on this page is courtesy of Center for Investment Education and Learning (CIEL).
Contributions by Girija Gadre, Arti Bhargava and Labdhi Mehta.