Currency fluctuations risk means the value of your investment in international stocks can change because of changes in exchange rates. When you invest in foreign stocks, your returns depend not only on the stock performance but also on the currency rate between your home currency and the foreign currency. If the foreign currency weakens against your currency (like the Indian Rupee), your returns may reduce even if the stock price goes up. This makes international investing riskier and less predictable.
What Causes Currency Fluctuations?
Currency values change due to many reasons like interest rate changes, inflation, economic growth, political events, and trade balances. These changes affect how much one currency is worth compared to another. For example, if the US dollar becomes stronger than the Indian Rupee, investments in US stocks might give better returns when converted back to Rupees. But if the Rupee strengthens, returns may fall. These ups and downs make currency risk important for international investors.
How Does Currency Risk Affect Returns?
Currency risk can either increase or decrease your investment returns. If the foreign currency rises in value compared to your home currency, your investment gains will be higher. But if it falls, your returns will be lower or you might even face losses. So, even if the international stock performs well, currency movements can impact your final profit or loss. This makes it harder to predict exact returns.
Can Currency Risk Be Managed?
Yes, currency risk can be managed but not completely avoided. Some investors use currency hedging tools like futures, options, or ETFs that protect against currency movements. Mutual funds or ETFs that invest internationally sometimes offer hedged options to reduce currency risk. However, these tools may add extra costs and reduce some gains. So, it's important to understand currency risk before investing internationally and choose the right strategy.
Why Should Indian Investors Care About Currency Risk?
Indian investors face currency risk because when investing in international stocks, their returns depend on how the Indian Rupee moves against foreign currencies. The Rupee can be volatile due to domestic economic factors, government policies, or global market changes. This can affect the actual returns you get in Rupees from international investments, making currency risk a key factor to consider.
How to Decide If You Should Take Currency Risk?
Deciding on currency risk depends on your investment goals, risk tolerance, and investment horizon. If you want long-term growth and can handle some ups and downs, currency risk may be acceptable. But if you want stable and predictable returns, you might prefer currency-hedged funds or avoid foreign investments. Always understand the risks and consult with financial advisors before investing internationally.
Contact Angel One Support at 7748000080 or 7771000860 for mutual fund investments, demat account opening, or trading queries.
© 2024 by Priya Sahu. All Rights Reserved.
