How a falling rupee can derail your financial plans
Posted by: Arti Bhargava on Jul 02, 2018, 06.30 AM IST
Sandeep has always wanted his children to study abroad. Keeping this in mind, he has been saving diligently. However, the falling rupee has left him concerned. The banks are unable to help him hedge the increasing cost of fees and the expenses he is likely to incur if the rupee continues to depreciate. Sandeep wants to know how he can mitigate this risk and ensure the goal does not get derailed.
Sandeep faces an exchange rate risk which has arised because his earnings are in rupees and his expenses towards his children’s education will be in dollars. What this means is, any appreciation in the rupee will work in his favour, while depreciation will increase the cost of education. As he cannot forecast the direction of the exchange rate correctly, he should not try to speculate on the value of the rupee. Currency derivatives may also turn out to be a risky choice.
As Sandeep has a clear goal in mind,hedging will be a better alternative. He needs to consider ways to earn dollar income from his rupee investments. For this, international investing will be a good choice like investing in dollar denominated bonds, ETFs, etc. He could also look at international funds that invest in global markets.
However, Sundeep should be careful not to choose risky international investments. Such investments could entail equity and country risks. Some international funds are global only in name as they may be only allocating a certain percentage to Indian stocks and companies. He must be wary of fancy funds that may have high costs and a very small size. He should choose the fund with a focus on his need to earn dollar incomes in order to mitigate his currency risk.