Equity mutual funds: How falling rupee may impact your portfolio

Mutual funds: Debt Funds perform poorly during increasing interest rate scenarios, say experts.

4 min read . 07:05 AM ISTAsit Manohar

• Equity mutual funds: Fall in rupee against the US dollar will impact short term return, believe experts

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Mutual funds: After the continuous fall in Indian National Rupee (INR) against the US dollar (USD), equity mutual fund investors are concerned about their returns as the Indian rupee hit all time low last week and some analysts are predicting further weakness in the Indian currency. According to market experts, rupee fall is caused by FPIs and FIIs continuous withdrawal from the Indian equity markets and rising crude oil prices in the international markets. But, foreign investors have been counter balanced by continuous buy by the DIIs and retail investors. However, India has managed to keep the inflation under control that may help rupee to gain its ground once the US Fed stance on interest rate changes from 'hawkish' to 'dovish.' So, medium and long-term equity mutual fund investors need not to panic as the rupee fall would mainly impact short term returns of equity mutual funds.

Rupee fall may hit debt mutual funds

On how falling rupee will impact one's equity mutual funds portfolio, Tanvi Kanchan, Head – Corporate Strategy at Anand Rathi said, "As foreign investors are pulling out of Indian equities, it is leading to rupee depreciation. The exit of foreign investors has caused a sharp fall in the equity markets. As a result, your investments in stocks and equity mutual funds are also likely to witness a decline. Not just equities, even your returns in Debt Funds could also shrink. That is because if rupee depreciation leads to a sharp rise in inflation, then RBI will increase interest rates. And Debt Funds perform poorly during increasing interest rate scenarios."

The Anand Rathi expert said that short term volatility will persist in all the equity mutual funds due to global factors as well as inflation numbers.

FII Vs DII

On how the rupee fall is going to impact Indian equity markets, Sandeep Pandey, Director at Basav Capital Advisory said, "Rupee fall can be attributed to mainly two reasons — FPIs and FII fishing out money from the Indian markets and rise in crude oil prices after Russia-Ukraine war. To contain inflation US Fed changed its stance on interest rate hike from 'dovish' to 'hawkish.' This actuated FPIs and FIIs to look at lucrative bond yield available in the US markets as new haven. Apart from this, Russia-Ukraine war triggered sharp rise in crude oil prices and India meets near 80 per cent of its oil demand from crude oil imports. So, all of a sudden, dollar outflow flow went northward leading to fall in the Indian currency. However, FPIs and FIIs withdrawal have been counter balanced by DIIs and retail investor in a competent manner that reflects in DII's average SIP monthly contribution being around ₹13,000 crore in last one year."

Speaking on the funds that may receive maximum beating after the rupee fall, Vijay Singhania, Chairman at TradeSmart said, “Rupee depreciation is not bad for all industries. For example, export companies are benefitted. So, individuals who might have invested within those sectors will benefit. Inputs detailing the impact of rupee depreciation on Equity MF portfolio. The Rupee depreciation is good for all USD based exporting companies as their income in Rupee terms will increase. The problem will be faced with companies whose end products are based on imports and their major sale is domestic. Hence, the funds will be impacted accordingly."

RBI's focus on inflation

Former Deputy Vice President of HDFC Bank went on to add that Indian government has been able to contain inflation despite concerns of treasury yield. He said that the Reserve Bank of India has been increasing interest rates to squeeze the money flow in the markets that helped keep inflation in India under control even when oil prices have shot up in both domestic and international markets. He said that central banks can't keep on rising the interest rates for long and at one point of time they will have to change their stance to 'dovish', which is expected to put breaks on FPIs and FIIs continuous withdrawal from the Indian equity markets.

"Central banks across world increasing the interest rates are for short term. In medium to long term, they will have to change their stance from hawkish to dovish and in that case, FPIs and FIIs are expected to stop withdrawing money from the Indian equity markets. So, equity mutual fund investors need not to panic if their time horizon is for medium to long term. However, this rupee fall may have its impact for short term."

Alternatives for short term mutual fund investors

Speaking on the alternatives to counter rupee depreciation hitting one's mutual funds return in short term, Tanvi Kanchan of Anand Rathi said, "Depreciation in rupee does not impact all equity-oriented mutual funds uniformly. Rupee depreciation largely benefits export-oriented sectors such as IT, Pharma Textiles as well as Speciality Chemicals. So, IT and Pharma sector funds as well as diversified equity funds having higher exposure to these sectors may stand to benefit. That said, the sector specific dynamics also matter and play a role in the performance of these funds. Therefore, rupee depreciation should not be the sole criteria for investing in these funds. In addition to that global funds or funds having exposure to US stocks are also direct beneficiary."