The Indian Rupee has been depreciating over the past few weeks and settled to its lowest this year on September 03, 2019 as it crossed the 72 per US Dollar mark. The decline was in tandem with other emerging economies as trade tensions between the US and China escalated and triggered weakening of Chinese Yuan. Investors thus turned to safe havens.
Meanwhile, the domestic environment was not conducive either. Foreign portfolio investors turned net sellers from July 2019 onwards as the government imposed higher tax surcharge on investment gains, causing the Rupee to tumble. Though the provision was later withdrawn, it did not have any significant impact on the Rupee.
Further, the government’s move to revoke special status given to the state of Jammu & Kashmir exposed India to political risk. To add to the woes, the country’s economy is showing clear signs of a slowdown. At 5%, the GDP growth in June 2019 quarter was at its six-year low.
Here are the factors which point to the poor health of the economy:
- Muted investments
- Weak consumption
- Low earnings growth of corporates
- Decline in GVA from agriculture and manufacturing
- Rising unemployment rate
- Liquidity crisis in NBFCs
Global and domestic economic slowdown does not bode well for the Rupee and the capital markets.
Chart: Rupee-Dollar exchange rate in last 1 year
When market conditions in the domestic market are unattractive, investors look for opportunities in the overseas market. This enables them to gain higher returns if the global markets are performing better than the Indian markets and to take advantage of exchange rate difference.
One can gain from some investment opportunities only available in a particular international market when they invest in offshore funds. Further, low correlation of domestic market with offshore market can enable diversification of the investment portfolio.
However, investment in offshore funds can expose you to several risks. The performance of your funds will be impacted by the various micro and macro-economic factors affecting the country towards which your fund is focused. Any changes in regulations and policies relating to trade, companies, industries, investments, and so on may put your investments at risk.
As international investments have exposure to foreign currencies, fluctuations in exchange rate can expose you to currency risk. Unfavourable political environment in a foreign country can also negatively impact your investments.
Additionally, it is important to know the tax implications of investments. For taxation purpose, a fund can qualify as an equity mutual fund if it invests more than 65% of its assets in Indian equities. Thus, if an offshore fund invests more than 35% of its assets abroad, it will qualify as a non-equity fund.
This means that short-term capital gains will be taxed as per the income tax slab applicable to the investor, whereas long-term capital gains will be taxed at 20% with indexation benefits or 10% without availing indexation benefit.
If the offshore fund invests 65% of its assets in India to qualify as an equity fund in India, it will defeat the purpose of diversification.
Should you invest in offshore funds?
You should invest in offshore funds only if domestic investment does not provide enough opportunities for diversification of the portfolio.
Remember that recent slowdown and a weak Rupee does not mean that India’s growth story is over. The government and the RBI have been taking measures to push economy back to growth and more measures are expected to be announced soon. These actions may start showing results in the medium to long term. On the other hand, all eyes will be on the outcome of the trade talks between the US and China to be held in October 2019.
The Rupee could continue to be under pressure in the near term.
To be able to tide over the current volatility in the market and slowdown in the economy, you should invest in a diversified portfolio of equity funds. Domestic mutual funds provide enough options that can help you in diversification of your portfolio and select schemes that can generate alpha.
You should select mutual fund based on your financial goals, risk appetite, and investment horizon, and not based on the current economic conditions.
Opt for the systematic investment plan (SIP) route to reduce volatility and take advantage of rupee-cost averaging. Additionally, you cannot ignore the need for a personalised asset allocation. Select the right fund after evaluating your needs and comparing the fund’s performance based on quantitative and qualitative parameters.