How do changes in exchange rates affect stock investments in foreign companies?

Exchange rate changes can directly impact your returns when you invest in foreign companies. If the rupee weakens against the foreign currency, your returns in INR increase. But if the rupee strengthens, your profits can reduce. Understanding how currency fluctuations work is key to making smart global investments.

What are exchange rates and how do they work?

An exchange rate tells you how much one currency is worth in terms of another. For example, if 1 USD = ₹83, then you need ₹83 to buy 1 dollar. These rates constantly change due to demand-supply, inflation, interest rates, and global events. Even small changes can impact your investment returns if you invest internationally.

How do exchange rates affect your foreign stock investments?

Let’s say you invest in a US stock. If the stock grows by 10%, but the rupee gets stronger against the dollar by 5%, your net gain in INR becomes just 5%. But if the rupee weakens, your returns can increase even more. So, the currency movement can either boost or reduce your final earnings.

Here’s a quick breakdown:

• Rupee Weakens: Your foreign returns are worth more in INR.
• Rupee Strengthens: Your foreign returns are worth less in INR.

Which sectors are most impacted by exchange rate changes?

Some industries and sectors are more sensitive to currency movements than others. For example:

• Export-driven companies: Benefit when the rupee weakens.
• Import-heavy sectors: Face higher costs when the rupee weakens.
• Foreign-listed companies: Investment returns depend on both company performance and currency value.

So, if you're investing in a foreign firm or a global mutual fund, it’s smart to watch both stock performance and currency movement.

Should you hedge your foreign investments?

If you're worried about currency risk, you can look into currency-hedged funds or ETFs. These protect you from exchange rate movements. However, they may cost a bit more. If you're investing long-term, short-term currency swings often balance out over time. So hedging may not always be necessary.

Currency changes play a big role in international investing. Even if the stock performs well, a negative currency shift can lower your returns. On the other hand, a favorable movement can multiply gains. So, if you're planning to invest in global markets, always keep an eye on the INR vs foreign currency trends.