Rupee near 80/$: How will it impact your equity mutual funds?

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The Indian rupee has been depreciating against the US dollar and is nearing the 80-mark. It is also pushing inflation up and impacting most equity mutual fund categories. The stock market analysts say that import-oriented sectors might have a tough time for some time because of the falling rupee. In the last one month, many equity mutual fund categories have been in red.

Due to the falling rupee, export-oriented sectors are supposed to go up. The BSE Sensex saw a 500-point rally on Monday, led by Nifty IT and metal stocks, both rising 1-3% in a day. PSBs, realty and consumer durable pockets were the next top gainers of the day.

Rupee movement in the last one month:

ET Online

Source: BSE

“Rupee depreciation largely benefits export-oriented sectors such as IT, Pharma, Textiles as well as specialty chemicals. IT and Pharma sector funds may stand to benefit. That said, the sector specific dynamics also matter and play a role in the performance of these funds. The IT sector is going through a rough patch because of many other reasons, hence the currency depreciation might not make a big difference,” said Himanshu Srivastava, Associate director- manager research, Morningstar India.

Mutual fund managers believe that as long as India runs a trade deficit, the rupee will have a tendency to weaken. A weakening rupee benefits exporters, making the foreign currency they earn more valuable in rupee terms. A recent report by the finance ministry cautioned that India’s current account deficit (CAD) is expected to deteriorate in the current fiscal on account of costlier imports and tepid merchandise exports.

Category 1-week returns (%) 1-month returns (%)
Consumption Funds 1.09% 8.20
MNC Funds 0.41% 6.17%
Pharma Funds 2.02% 4.54%
Banking Funds -1.01% 4.47%

Source: Value Research

“Some persistent exporters may have a significant portion of their costs also denominated in the same foreign currency. As such, those benefiting from a weaker rupee form a very short list. Also, the recent weakening of the rupee appears sharp but is very much in line with trend and expectations from a longer term perspective. It has depreciated at an annualised rate of less than 3.5% over the last two years despite the covid related challenges that we have faced including a tripling of international oil prices,” said Rajiv Shastri, Director, and CEO, NJ AMC.

Mutual fund advisors always urge investors not to get distracted from their long-term goals by these transitory events. Investors are best served by sticking to their investment plans. Another advice that these experts give is to trust a diversified fund rather than taking tactical calls in sectors. This protects investors from downside and also gives them benefits of a well-researched portfolio.

“My sense is that if investors have already outsourced this job to a well diversified proven fund, then they should let the fund manager worry about the currency movements and make any adjustments if required. The key idea is to diversify across different investment styles/ strategies and stay invested patiently for 5-7 years. Your fund manager will add the sectors that have a positive outlook and cut exposure to those which might be badly hit,” says Arun Kumar, Head of Research, Funds India.

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