Investor Corner/The wider picture/Risk, Regulation & Advanced Ideas
5.3.5 Currency Risk (International)
Currency risk arises when investing abroad. Even if the foreign market performs well in its own currency, the return actually received in rupees can differ meaningfully depending on how the rupee moved over the same period.
How currency movement changes the outcome
If a US fund returns 12% in dollar terms over a year, and the rupee weakens against the dollar over that same period, the return converted back into rupees will typically be higher than 12%, because each dollar of gain is now worth more rupees than it was at the start. If the rupee instead strengthens against the dollar, the rupee return will typically be lower than the dollar return, sometimes considerably so.
Why this can work for or against an investor
Currency movement adds a genuine layer of both risk and potential extra return that is entirely separate from how the underlying foreign market itself actually performed. Over long periods, currency effects can meaningfully add to or subtract from an international investment's rupee return, and predicting currency direction in advance is at least as difficult as predicting stock market direction.
Living with the uncertainty
Most retail international funds available in India do not hedge this currency exposure, meaning investors are accepting both the foreign market's own return and the currency's movement as a single combined outcome. Understanding that this added variability exists, rather than being surprised by it later, is the more important takeaway than trying to actively predict which direction the currency will move.
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