Investing Abroad, and the Currency That Comes With It

Two things in one purchase

Kabir buys a fund holding foreign shares. His return will now depend on two separate things.

What the shares did, in their own currency. And what that currency did against the rupee, because his money left in rupees and will come back in rupees.

Those are independent, and either can dominate. Shares that rose can turn into a poor result if the currency moved against him; shares that went nowhere can produce a decent one if it moved his way.

The first step is simply to notice that you have bought both. Most descriptions of international investing discuss the first and mention the second in passing, which is backwards for an Indian investor, because the currency component is not small.

Why international exposure is worth having

Your home market is one economy. However many Indian companies you own, your outcome depends on one country's conditions, policy and prospects. That is a concentration, and it is invisible because it is the default — how diversification works.

It is genuinely different. Of the ways to diversify within shares, a different country adds the most, because the businesses, the customers and the economic conditions all differ. Adding another domestic index adds far less — combining broad market indices.

Some industries barely exist at home. A domestic index gives you the industries your country has, in the proportions it has them. Anything under-represented can only be reached abroad.

And your income is already domestic. Your earnings, your property, your career all depend on the home economy. The largest asset most people own is their future earnings, and it is entirely concentrated in one country — which is a reason for the portfolio to lean the other way rather than reinforce it.

The currency, in both directions

For an Indian investor the currency component has a specific shape worth understanding.

If the rupee weakens against the currency you invested in, your foreign holdings are worth more in rupees. If it strengthens, they are worth less. So foreign holdings tend to help exactly when the domestic currency is under pressure — which is often a period when domestic conditions are difficult anyway. That is a genuine diversification benefit and it is the strongest argument for the exposure.

But it is not free, and three things temper it.

It is a second source of variability. A holding can lose you money through the currency alone, with the underlying businesses doing perfectly well.

It is not a reliable one-way bet. Currencies move in both directions over the periods that matter, and an expectation that one will move a particular way is a forecast rather than a plan.

And hedging is a choice with a cost. Some funds remove the currency exposure. Doing so removes the benefit as well as the risk, and it costs something. Neither hedged nor unhedged is correct in general; what matters is knowing which you hold, since a hedged and an unhedged fund holding identical shares will deliver different results.

The frictions

International holdings carry practical costs that domestic ones do not: charges tend to be higher, there may be limits or procedures on moving money abroad, tax treatment can differ from domestic equity, and reporting requirements may apply.

We quote no figures for any of these. Charges are per fund, the rules on moving money and the tax treatment are statutory and change, and nothing in this repository sources the current position. They are named here because they are real and because they change the arithmetic; establish them for your own situation before deciding a size.

The tax point deserves emphasis for a reason beyond the rate: if foreign holdings are taxed less favourably than domestic ones, that changes the after-tax case materially, and it is the sort of detail that is easy to discover after the fact.

How much

Two arguments pull in opposite directions and both are legitimate.

For more: your income, your property and your existing portfolio are all domestic, so on a whole balance-sheet view the home concentration is very large indeed.

For less: your liabilities are in rupees. The things you are saving for — education, a house, retirement — will be paid for in rupees, so holding assets in another currency introduces a mismatch against your actual future spending. A goal denominated in a foreign currency, such as overseas education, reverses that argument entirely and is one of the clearest cases for the exposure — planning overseas education costs.

Between them sits a moderate allocation, sized deliberately, held through the periods when it looks wrong. We give no percentage: any figure would need evidence about the correlation between Indian and foreign markets and about currency behaviour over long periods, and this site holds neither. Someone quoting you a specific allocation is either citing research they should name or offering a convention.

What to take away

Investing abroad buys businesses and a currency at the same time. The currency is not a side effect to be tolerated — for an Indian investor it is part of why the holding diversifies, because it tends to help when the rupee is under pressure.

Hold some, size it deliberately, know whether your fund is hedged, and check the tax and the frictions before you commit. And remember that what you are saving for is mostly priced in rupees, which is the honest argument for moderation.