5.1.5 Currency Hedging

What currency hedging actually does

A hedged international fund uses financial instruments specifically designed to substantially offset the effect of currency movement, aiming to deliver a return closer to the foreign market's own local-currency performance, largely stripped of the additional currency effect. An unhedged fund makes no such attempt, meaning the investor's actual rupee return combines both the foreign market's own performance and whatever currency movement happened to occur over the same period.

The trade-off inherent in each choice

Hedging generally reduces the added volatility that comes specifically from currency movement, but it also carries its own ongoing cost, and it can occasionally forgo a favourable currency movement that would otherwise have added meaningfully to returns. Leaving currency exposure unhedged accepts additional variability in exchange for potentially benefiting from favourable currency moves, while equally being exposed to unfavourable ones.

There is no universally correct default here

Whether hedging is worthwhile depends on an investor's own view of likely currency direction over their relevant time horizon, and on how much of that added currency-driven variability they are comfortable accepting on top of the underlying foreign market's own return. Most retail international funds available in India are, in practice, unhedged, which is simply a fact worth being aware of rather than something to be surprised by later.