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How to insulate your portfolio from the rupee slide ?

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Here are some options that can lend stability to your investments



The unprecedented slide in the rupee has not only played havoc with the common man's budget, but also whittled his investment portfolio. Neither equity nor debt markets have been spared. So, while stocks across the board have taken a beating and equity mutual funds are feeling the heat, debt funds have also taken a hit. Their yields have soared after the RBI's attempt to stem the rupee's fall by squeezing liquidity. While it isn't easy to predict the extent to which the rupee will fall or whether it will bounce back, the consensus is that the uncertainty will last for some time. Hence, your investments will continue to be exposed to the currency's vagaries. To insulate your portfolio from the rupee's impact, make sure you hold some investments that benefit from its fall. Though it may be a little late to invest in such avenues, here are some options that bank not only on the rupee's weakness but on their inherent strengths.


International funds


Mutual funds that invest in international equities are a good way to hedge your portfolio against the rupee. While you invest in these schemes in rupees, the money is invested abroad in dollars. The NAV of the scheme fluctuates not only according to the change in the price of the underlying shares, but also reflects the change in the exchange rate, as the value of dollar investments is converted to rupees to calculate the NAV. So, if the dollar appreciates against the rupee, one can expect a jump in returns from the global fund. If the underlying portfolio also gains in value, it is a double bonanza. Suppose the NAV is 100 at the time of investment. A year later, the underlying portfolio gains 15%, leading to a notional NAV of 115. However, if the dollar rises by 10% in this period, the NAV will rise to 125, and your total return will be 25%, instead of 15%. Of course, this can work the other way round, leading to currency risk. If the rupee appreciates, the performance of these funds may fall even if the underlying portfolio gains in value. As the table shows, international funds have outperformed most other investments in the past few months riding on the currency factor. However, don't rush in purely to cash in on the rupee's weakness. A global fund also offers diversification, which should be the main reason for investing. With the Indian economy facing a slowdown, a US-focused fund, for instance, will allow the investor to gain from the recovery in the US economy. The direction of the rupee should not be of concern. Opt for an international fund to benefit from its inherent diversification, not for the extra returns. Choose the fund wisely as these come in different flavours, investing in global companies, regional themes, even commodities. Limit the exposure to 10% of your portfolio.


Export-oriented companies


The firms that earn their revenue largely in dollars stand to gain from the rupee's slide. When the dollar earnings are converted to rupees, the company's margins become stronger, leading to a jump in its share price. This is also reflected in the behaviour of FIIs, which continue to pick stocks in export-oriented sectors. IT and pharma firms are best placed to benefit from this scenario.
However, even these will not be able to fully capture the benefit of the rupee fall as most hedge a portion of their earnings at a fixed exchange rate. So if a company had hedged its revenue at 55 to the dollar, the rupee's slide beyond this level will not flow to these companies immediately. Only those that keep a bigger portion of the revenue un-hedged will make immediate and meaningful gains, while the others will benefit only after a lag. Compared to the sector biggies, the mid-tier technology firms like NIIT Technologies, Hexaware Technologies and MindTree earn a bigger chunk of their revenues from the US. Typically, a 1% fall in the rupee helps Indian IT and pharma firms improve their operating margins by 30-50 basis poi nts. Besides, both pharma and IT are being seen as good defensive bets in the current scenario. Don't keep more than 20% of your corpus in such stocks as any rupee appreciation may hurt if you have a higher exposure.


Gold


Another beneficiary of the rupee's fall is gold. As India is a gold importer, the local price is derived after converting the dollar into rupee. So a sharp depreciation in the rupee sees a jump in gold price to the same extent.


In the past two months, the global price of gold has jumped from $1,200 an ounce to $1,400, a 17% rise. But since the rupee has depreciated, the price for local buyers has gone up by nearly 22%. What's further aiding the price jump is the hike in import duty (from 2% in January 2012 to 10% now). This, along with the rupee fall, has led to a sharp rise in the landed price of gold. A further dip in the exchange rate or hike in import duty will boost gold's price. So, add gold to your portfolio to cushion it against the rupee's fall. Experts feel currency should not be the driving factor and gold exposure should not exceed 10% of the portfolio. As it's not correlated to other asset classes, it lends stability to a portfolio if the other asset classes are not doing well.

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