Explained: For future dollar spending, should you invest in US markets now?

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As the rupee reached 80 against the US dollar this week, one of the big concerns of Indians who expect to spend in dollars in the future – due to children’s higher education, travel, etc. – is how they can hedge against further depreciation of the currency, which would increase the cost of rupees such dollar-denominated expenditures. If this warrants exposure to US markets, there are various factors to consider here as well – talk about recessionand the US capital market is becoming volatile high inflation and interest rate hikes. So, does it make sense to invest abroad now?

Why opt for global diversification?

Over the past 11 months, the rupee has depreciated by nearly 10% against the dollar. This means that if an individual has to send $10,000 for their child’s school fees in August 2022, they will end up paying Rs 8 lakh compared to Rs 7.2 lakh last year.

In theory, if the rupee were to depreciate by 20% over the next 10 years, it would increase the cost of education in rupee by 20%. However, if one were to invest in international funds of funds investing in the US, offered by domestic mutual funds, or direct stocks or even US debt, investors can clearly hedge against the impact depreciation.

“We believe the US Dollar will always be stronger than the Indian Rupee as traditionally India is a current account deficit economy and the US a current account surplus economy. interest rates between the United States and India,” said Nasser Salim, managing partner at Flexi Capital, a boutique investment services firm.

Experts expect the dollar to strengthen further against all other currencies and say it is important for retail investors to hedge against future depreciation of the rupee, especially if they are planning further spending important in dollars.

In addition, geographic diversification, particularly in the United States, gives investors exposure to quality multinationals, from which they will benefit from the growth. What are the overseas routes for Indian investors?

Three paths are open.

DIRECT INVESTMENT: Under the LRS, the Reserve Bank of India (RBI) allows resident individuals to contribute up to $2,50,000 per fiscal year for any authorized current or capital account transaction. Indians invested $746.57 million in equity and debt in 2021-22 compared to $471.80 million in 2020-21 by opening an overseas trading account with a broker.

IFSC PLATFORM: Indian investors are now allowed to trade the shares of 50 major US companies through the NSE International Exchange, starting March 3. Trading in US stocks will be facilitated through the NSE IFSC platform at GIFT City, Ahmedabad. This means domestic investors can buy US stocks such as Amazon, Alphabet, Tesla, Meta Platforms, Microsoft, Netflix, Apple and Walmart. The NSE IFSC has announced the trading format for eight US stocks, with details on the remaining 42 to be announced at a later date.

MUTUAL FUND : The most popular route is the fund of funds (FoF), considered safe by investors: an Indian asset management company (AMC) launches a fund in India with the authorization of the regulator SEBI and raises money from local investors to invest in an international mutual fund. . “It is less risky because the Indian AMC does not need to monitor the performance of its overseas investments on a daily basis. Many Indian MFs have started such funds of funds to invest in foreign funds, which in turn invest in stocks listed on the New York Stock Exchange and Nasdaq,” said a fund manager.

Foreign assets of mutual funds stood at 20,865 crore rupees ($2.9 billion) at the end of March 2021, a sharp increase from 5,808 crore rupees in March 2020, according to the RBI. Although the latest data is not available, fund companies estimate that overseas investments would have topped Rs 50,000 crore ($6.7 billion) as global markets had a bull run through December .

Foreign equity investments of money market funds are largely concentrated in the United States and Luxembourg.

What has changed for Indian investors?

Indians have started focusing on overseas investments in recent years. These investments, which now fetch nearly $7 billion (Rs 56,000 crore), are mostly in stocks listed on the New York Stock Exchange and Nasdaq.

However, this has mostly translated into equities rather than debt securities in the US, as interest income is lower than in India. Indian bonds and other debt securities offer at least 3-4 percentage points more yield in the domestic market.

With the US economy facing turmoil, stocks there also came under selling pressure. The Dow Jones Industrial Average has fallen nearly 13% since January.

Should you invest abroad?

The volatile economic scenario has raised many concerns among those considering investing in US stocks or debt securities. Investments must be made with a view to protecting against the appreciation of the dollar and benefiting from the growth of American entities.

The “buy when the price goes down” principle can work in the US market, where the stock prices of many large companies have fallen by 10-15%. There could be more pain for the US economy. “We now expect the U.S. economy to contract slightly this year and expect 2022 Q4-Q4 real GDP to decline 1.4%, followed by an increase of 1.0% in 2023. “, says a research report from Bank of America (BofA).

With a steeper slowdown and higher unemployment, inflation is expected to moderate somewhat faster than before. “We expect headline PCE inflation to decline to 4.9% in 2022 and 2.5% in 2023. Our forecast puts inflation broadly in line with the Fed’s 2% mandate by the end of 2024,” BofA said. Anyone looking at US stocks should invest with a long-term horizon. “While debt investments in the US may make sense at this time or after a few months when yields have peaked following expected Fed rate hikes, equity investments may be made in a staggered fashion. “Salim said.

What is the RBI rule?

Indian mutual funds registered with SEBI are allowed to invest within an aggregate cap of $7 billion, the RBI says in its main circular issued on January 1, 2016. But with the MF sector set to exceed the limit , SEBI had earlier this year instructed MFs with overseas exposure to temporarily halt lump sum purchases and switch to other programs effective Feb. 2. Although the RBI has not yet raised the cap to $7 billion, MFs are allowed to invest overseas up to the limit.

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