How do currency-hedged mutual funds function?

Currency-hedged mutual funds are designed to protect investors from the impact of foreign exchange fluctuations when they invest in international assets. These funds use strategies like currency forwards or options to neutralize currency risk and ensure returns are more reflective of the underlying assets rather than currency movement.

What Are Currency-Hedged Mutual Funds?

Currency-hedged mutual funds invest in foreign markets but use financial instruments to offset the currency risk involved. Without hedging, if the foreign currency weakens against the Indian rupee, returns can drop even if the foreign asset performs well. These funds eliminate that uncertainty by locking in exchange rates in advance.

How Do They Work?

These funds typically invest in overseas equities or bonds. To manage the currency exposure, they use hedging tools like:

• Currency forwards: Agreements to exchange currency at a set rate in the future.
• Currency futures: Standardized contracts traded on exchanges.
• Options contracts: Give the fund the right, but not obligation, to exchange at a predetermined rate.

By using these, the fund can minimize losses due to currency depreciation or volatility.

Why Investors Choose Currency-Hedged Funds

Here are the main reasons why investors consider currency-hedged mutual funds:

• Stable Returns: Returns are more aligned with the underlying asset performance.
• Reduced Volatility: Currency movements are unpredictable; hedging reduces swings.
• Ideal for Long-Term Investors: Helps preserve value over time in international portfolios.

For Indian investors, these funds provide global diversification without the added worry of rupee appreciation or depreciation.

Key Considerations Before Investing

Although currency-hedged funds reduce one major risk, investors should still consider the following:

• Hedging Cost: Managing currency risk involves additional expenses that may lower returns.
• Market Exposure: Currency-hedged funds still carry risks related to the performance of foreign markets.
• Fund Strategy: Some funds may not fully hedge or may change strategies depending on market conditions.

Review the fund’s fact sheet and strategy document before investing, and consult with a financial advisor for guidance based on your goals.

Currency-hedged mutual funds offer a smart way to tap into global markets while protecting your investments from foreign exchange swings. These funds allow Indian investors to focus on asset performance rather than currency fluctuations, making them a valuable tool for diversification and stable international exposure.