Ramesh Mehta invested his money in an international mutual fund.

This fund invested its corpus in the equity of companies based in the U.S. At the time of investment, the NAV of the mutual fund stood at ₹133.

Since the money was going to be invested in the U.S., the fund had to convert its corpus into U.S. dollars. The price of $1 was about ₹65 when he invested. Therefore, indirectly Mr. Mehta invested about $2.04 per unit. He was tracking the U.S. equity market performance and it was excellent.

After about two years, Mr. Mehta needed funds and decided to liquidate his investment. During that time, U.S. equities had risen substantially.

He was very happy and was waiting for a large windfall but when the money actually came in, he was shocked. He had made a loss! This was because while the U.S. equity market had gone up, the Indian rupee had strengthened against the U.S. dollar.

Loss on conversion

Now, $1 was equal to ₹60. Therefore, even though the value of his investment went up, he lost on conversion.

On the other hand, my client Ms. Benergee benefitted during the erosion in the value of the Indian rupee. She had worked in the U.S. for about 25 years before returning to India. During those 25 years she had accumulated a lot of money in her retirement savings fund (in the U.S., it is called 401K). The total amount was ₹75,000.

When she returned to India, the value of $1 was ₹60. After about 2.5 years, the value of $1 had depreciated and it was now $1 to ₹65. Had Ms. Benerjee redeemed her money earlier, she would have received a lower amount.

Small but gratifying

Many years ago, I remember going for a conference to the United Kingdom. I had purchased British pounds at the rate of ₹76 for £1. When I returned home, I went to encash the unspent pounds. By then, the value of the British pound had gone up to ₹76.75 per GBP. I received more funds then what I had paid per GBP. The amount was very small but I felt very happy.

All the above examples are of past and hence, conversion rates mentioned in those examples and what is prevailing today is different. All examples are real, only names have been changed to maintain confidentiality.

Whenever we invest in instruments outside our country, we are exposing ourselves to foreign exchange risk.

Forex movements

In such instances, we are exposed to movements in the foreign exchange market. Many a times, I advised my NRI clients not to invest in Indian markets.

There are several instances where the Indian markets have performed well but NRI investors have not got similar returns because they have lost out on the foreign exchange movement when they convert the rupees back into U.S. dollars.

Double risk

NRIs feel that bank fixed deposits (FDs) in India are giving higher returns (interest rates) than in their country. While the rate of interest could be more than that offered on comparable investments in their country, they are taking a double risk.

Firstly, converting their local currency into Indian rupees and later, on maturity of the FDs, converting rupees into their local currency. It is important to factor in these risks.

There are options to hedge this risk. However, we are not discussing those in this article.

This is not to suggest not to invest outside one’s country. That is even more riskier. Today most Indians have all their investments in India. This could be in gold, equity, real estate and debt. If for some reason, there is turbulence in India, all forms of investments will take a beating.

We have discussed diversification across countries in earlier articles. Please do invest across the globe whenever possible but factor in foreign exchange risks while investing outside your country.

(The writer is a financial planner and is the author of Yogic Wealth)

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