Equity Mutual Funds: How the Falling Rupee May Affect Your Portfolio

Mutual fund : After the Indian National Rupee (INR) continues to fall against the US Dollar (USD), equity mutual fund investors are worried about their returns as the Indian Rupee hit its lowest level last week and some analysts are predicting further weakness in the Indian currency. According to market experts, the fall in the rupee is caused by the continued withdrawal of REITs and FIIs from Indian stock markets and rising crude oil prices in international markets. But, foreign investors were offset by continued buying by DIIs and retail investors. However, India has managed to keep inflation under control, which could help the rupiah gain ground once the US Fed’s stance on interest rates shifts from hawkish to dovish. So, medium to long-term equity mutual fund investors should not panic as the falling rupiah would mainly affect the short-term equity mutual fund returns.

Falling Rupee Could Hit Mutual Funds

On the impact of the falling rupiah on the equity mutual fund portfolio, Tanvi Kanchan, head of corporate strategy at Anand Rathi, said: “As foreign investors pull back from Indian equities, this leads to a depreciation of the rupee. The exit of foreign investors caused a sharp decline in stock markets. Therefore, your investments in stocks and equity mutual funds are also likely to experience a decline. Not just equities, but even your returns in debt funds could decline as well. Indeed, if the depreciation of the rupee leads to a sharp rise in inflation, then RBI will raise interest rates. And debt funds perform poorly in rising interest rate scenarios.

Expert Anand Rathi said short-term volatility will persist across all mutual funds due to global factors as well as inflation figures.

FII versus DII

On the impact of the Rupee’s fall on Indian equity markets, Sandeep Pandey, Director of Basav Capital Advisory, said: “The Rupee’s fall can be attributed mainly to two reasons – REITs and FIIs seeking equity. money in Indian markets and rising crude oil prices after the Russian-Ukrainian war. To contain inflation, the US Fed changed its stance on raising interest rates from “accommodative” to ” This has caused REITs and FIIs to view the lucrative bond yields available in US markets as a new haven. India satisfies nearly 80% of its oil demand from crude oil imports, so all of a sudden the outflow of dollars headed north causing the Indian currency to fall. the withdrawal of REITs e t from FIIs has been counterbalanced by DIIs and retail investors in a proficient manner which is reflected in the average monthly contribution of DII’s SIP being around 13,000 crore in the last year.”

RBI’s Focus on Inflation

The former assistant vice president of HDFC Bank went on to add that the Indian government has been able to contain inflation despite concerns over Treasury yield. He said the Reserve Bank of India raised interest rates to reduce the flow of money into the markets, which helped control inflation in India even when oil prices soared on national and international markets. He said central banks can’t keep raising interest rates for long and at some point will have to change their stance to ‘dovish’ which should put pauses on the continued pullback Indian equity REITs and FIIs. markets.

“Central banks around the world are raising short-term interest rates. In the medium to long term, they will need to change their stance from hawkish to dovish and in that case REITs and FIIs should stop withdrawing money. money from Indian stock markets.So investors in equity mutual funds should not panic if their time horizon is medium to long term.However, this fall in the rupee may have a short-term impact.

Alternatives for Short-Term Mutual Fund Investors

Speaking on alternatives to counter Rupee depreciation which affects short-term mutual fund yield, Anand Rathi’s Tanvi Kanchan said, “Rupee depreciation does not have a uniform impact on all equity-oriented mutual funds. The depreciation of the rupee greatly benefits export-oriented sectors such as IT. , Pharma Textiles as well as Specialty Chemicals. Thus funds in the IT and pharmaceutical sectors as well as diversified equity funds with higher exposure to these sectors could benefit. That said, sector-specific dynamics are also important and play a role in the performance of Therefore, the depreciation of the rupee should not be the only criterion for investing in these funds. In addition to this, global funds or funds with exposure to US equities are also direct beneficiaries.

Disclaimer: The opinions and recommendations made above are those of individual analysts or brokerage firms, and not of Mint.

Catch all the trade news, market news, breaking news and latest updates on Live Mint. Download the Mint News app to get daily market updates.

More less

To subscribe to Mint Bulletins

* Enter a valid email

* Thank you for subscribing to our newsletter.

Comments are closed.