Indian Rupee: Worth Investing In The Long Term?

The Indian rupee has been depreciating against the US dollar, and this has a significant impact on investments. For NRIs, the depreciation of the rupee makes it an ideal time to invest in India, as their money will go further. However, for those looking to travel abroad or send their children to study overseas, the falling rupee is bad news.

The falling value of the rupee can also make foreign stock investments more profitable, and it increases bond yields, which can attract more foreign institutional investment. However, it can negatively impact the real estate industry and long-term debt funds.

When deciding whether to invest in the Indian rupee, it is important to consider your own risk profile and the associated risks of the investment product. While the rupee's depreciation can create investment opportunities, it is essential to be aware of the potential risks and volatility involved.

Foreign stock investments

Indian Fund Houses with Foreign Tie-Ups

One of the easiest ways to invest in foreign stocks is through Indian fund houses. This allows investors to access foreign stocks without the hassle of seeking permission or dealing with the risks of investing in foreign currencies. Look for Indian fund houses offering mutual funds with names like "Emerging Market" or "Europe Focus," suggesting that they have invested in foreign stocks via a local market. You can track the movement of these stocks by monitoring the Net Asset Value (NAV) of the mutual fund purchased in India.

Funds of Funds (FoF) Mutual Funds

Funds of Funds (FoF) mutual funds are another option for foreign share trading. These mutual funds purchase units in international stocks, allowing you to keep track of economic changes in the international markets while also providing a cushion against volatile performance in the Indian stock market. Investing in foreign stocks through FoF can help protect your portfolio during periods of falling Sensex.

Direct Investment in International Funds

According to the Reserve Bank of India (RBI), Indian residents can invest up to $250,000 per year in direct foreign investments without any permissions under the Liberalised Remittance Scheme (LRS). While there is an annual cap on the total amount invested, there is no limit within the international fund itself. You can open a trading account with an international broker to start investing directly in international funds.

Exchange-Traded Funds (ETFs)

Exchange-Traded Funds (ETFs) are the third option for foreign share trading. ETFs are traded on stock exchanges throughout the day, with prices fluctuating, unlike mutual funds, which are typically bought or sold once per day after the market closes. You can invest in ETFs available on international indices, giving you exposure to a basket of international stocks without requiring direct access to foreign markets. Indian brokers also offer ETFs as investment options directly from the local market. Remember to choose ETFs registered with the Securities and Exchange Board of India (SEBI) to reduce your trading risk. Additionally, ETFs have lower expense ratios than mutual funds, making them a more cost-effective option.

When investing in foreign stocks, it's important to be aware of the risks, such as currency exchange risk and the higher costs associated with international trading accounts. However, foreign stock investments can provide valuable diversification and access to global opportunities.

Gold price

Gold is one of the world's most popular investment tools, especially in India. It is deemed to be in its purest form at 24 carats, which signifies 99.9% purity. Pure gold is used to make gold coins, bars, and other items. However, 22-carat gold, which is 91.6% pure, is more suitable for jewellery making. The price of gold in India is quoted in the local currency, the Indian Rupee, and may also be quoted in other key global currencies.

Gold is one of the world's largest consumers of gold, and the metal plays a special role in the country. The Indian wedding season is famous for fuelling demand for gold jewellery, but the jewellery is also considered a reliable store of wealth and value and a symbol of prosperity. Many Indians do not have bank accounts, and inflation may run higher than benchmark interest rates and bond yields. Gold has long been considered an important asset, and the tradition of giving gold remains robust today.

• Demand and supply: Like any other commodity, gold prices are impacted by the balance between demand and supply. Increased demand with constrained or low supply typically leads to a price increase.
• Inflation: During inflation, the value of the currency decreases, and individuals may prefer to hold their money in the form of gold, leading to a spike in gold prices.
• Interest rates: Gold and interest rates tend to have an inverse relationship. As interest rates rise, people tend to sell their gold to earn higher interest, while lower interest rates encourage gold purchases.
• Rural demand: A significant portion of gold demand in India comes from rural areas, and this demand usually increases after a good monsoon, harvest, and resultant profits.
• Government reserves: If the government's gold reserve exceeds the amount of gold sold, prices increase due to insufficient supply.
• Currency fluctuations: Gold trade in the international market is transacted in US dollars. When importing gold to India, the conversion of US dollars to Indian rupees can cause fluctuations in gold prices. A depreciation of the Indian rupee usually makes gold imports more expensive.
• Correlation with other assets: Gold has a low to negative correlation with other major asset classes, making it a valuable portfolio diversifier.
• Geopolitical factors: During geopolitical turmoil, such as war, the demand for gold tends to increase as a safe haven for funds, leading to higher gold prices.
• Local taxes: Octroi charges and entry taxes are levied on gold when it enters a city or state. Additionally, a wealth tax is imposed on gold valued above a certain threshold.
• Making charges: These refer to the cost of producing and designing gold jewellery and are added to the final cost before levying Goods and Services Tax (GST).

Gold can be purchased in various forms, including coins, bars, and jewellery. When investing in gold, it is essential to consider factors such as purity, genuine certification, price fluctuations, and making charges. Gold is touted as one of the safest financial tools against inflation and is a good portfolio diversifier.

Bond yield

The Indian rupee has depreciated by 61% against the US dollar over the past ten years, 11% in the past five, and 4% in 2020. This means that for Indians, travel abroad, foreign education, and imports have become more expensive.

However, Indian stocks have rocketed since 2020, and greater currency stability has allowed foreign investors to share in most of those gains. The rupee has done well against the pound, and even measured against a stronger currency like the US dollar, the gains have been substantial. The MSCI India is up by 14% per year, including dividends, in dollar terms over three years.

The yield on the India 10-Year Government Bond is currently 6.935%. This is down from 7.069% in August 2024. The yield on this bond is higher than that of the US 10-Year and the UK 10-Year. The India 5-Years Credit Default Swap is 84.08 basis points, with an implied probability of default of 1.40%.

India's central bank rate stands at 6.50%, with the most recent adjustment in February 2023. The country's credit rating by Standard & Poor's is BBB-.

Real estate

However, investing in real estate is not a decision to be taken lightly. There are risks and rewards, and it's important to understand the market before investing your money.

• Location: Choose a location with good connectivity, infrastructure, and amenities. Areas expected to see future development and growth may be good investment options.
• Budget: Consider all costs, including stamp duty, registration fees, and maintenance charges.
• Legal due diligence: Ensure all necessary legal documents are in place, such as the title deed, building plan, and occupancy certificate.
• Investment strategy: Decide on an investment strategy that suits your goals and risk appetite. Options include direct investment, commercial property, REITs, fractional investment, and mutual funds.
• Market research: The real estate market in India is highly localised, so what works in one city may not work in another. Research property prices, rental rates, and vacancy rates in your desired area.
• Rental yields: The average rental yield in India is around 2-3%, which is relatively low. This means that rental income may not cover all expenses, including society maintenance, property tax, and income tax.
• Capital appreciation: The capital appreciation of property in India has been low in recent years due to an oversupply of real estate and an economic slowdown.
• Challenges of ownership: Being a property owner comes with its own set of challenges, including delayed rent payments, society restrictions, leakage issues, and the potential nightmare of tenants refusing to vacate.

Advantages of Investing in Real Estate in India:

• Security: Real estate offers a sense of security as a tangible asset. Its value fluctuates less than stocks and mutual funds and is unaffected by market volatility.
• Consistent rental yield: Real estate provides a consistent source of passive income through rental revenue, which can also increase over time.
• Government policies: The Indian government has introduced favourable policies, such as the Real Estate (Regulation and Development) Act, to boost transparency and buyer confidence in the real estate sector.
• High demand: With India's growing population and urbanisation, the demand for housing and commercial spaces is expected to continue rising.
• Strong economic growth: India's robust economic growth, driven by sectors such as IT, manufacturing, and services, has positioned it as one of the world's fastest-growing economies. This translates into rising demand for residential and commercial properties.
• Favourable policies and regulations: The Indian government has introduced initiatives and reforms to attract foreign investments in real estate, enhancing transparency, boosting confidence, and streamlining processes.
• Diversification: Investing in Indian real estate allows for diversification across geographies and asset classes, potentially achieving higher returns while mitigating risks.
• Competitive property prices: Indian properties often offer more affordable investment options compared to developed countries.
• Rental income potential: With a growing population and increasing urbanisation, there is consistent demand for rental properties in India, providing a steady stream of rental income.
• Emotional connection and future planning: For those with strong ties to India, investing in real estate can provide a sense of connection to their homeland and the possibility of having a ready-made property for personal use or as a legacy for future generations.
• Retirement planning: Real estate in India can serve as a strategic tool for retirement, providing a comfortable home and a steady income stream during retirement.

Disadvantages of Investing in Real Estate in India:

• Low rental yields: The average rental yield in India is around 2-3%, which is relatively low compared to other investments.
• High home loan rates: Home loan interest rates are currently around 9%, which can wipe out any profits made from renting out the property.
• Low capital appreciation: In the last 10 years, the average annual return on residential property in India has been around 4%, lower than returns on equity, gold, and even fixed deposits.
• Challenges of ownership: Being a property owner comes with challenges that require time and effort, including delayed rent payments, society restrictions, leakage issues, and potential legal issues with tenants refusing to vacate.

Alternative Ways to Invest in Real Estate:

• REITs (Real Estate Investment Trusts): REITs are companies that own and operate income-producing real estate. They are traded on stock exchanges, providing more liquidity than direct property ownership.
• Fractional ownership: This option involves multiple investors focusing on a single asset, reducing the investment cost while providing diversification across asset subclasses.
• Mutual funds: Real estate mutual funds invest in real estate-related assets such as REITs, real estate stocks, and securities, allowing investors to test the waters of the real estate market without the hassle of direct ownership.
• Fix-and-flip: This mode involves investing in a property that needs maintenance, fixing it up, and selling it at a higher price. This requires market knowledge but has fewer constraints regarding maintenance and registration.
• Renting out a portion of your existing property: This option allows you to start small by renting a room or an unused floor of your current house to commercial or residential tenants.

Long-term debt funds

When considering long-term debt funds, it is important to evaluate the lending duration and the type of borrower. The risk level of the fund is determined by these factors. For instance, funds that lend to banks and Public Sector Units (PSUs) are considered safer than those investing in lower-rated bonds to increase yields.

When investing in long-term debt funds, it is crucial to consider the associated risks and taxes. Interest rate risk and credit risk are two key factors that can impact the performance of these funds. Additionally, understanding the tax implications, such as short-term and long-term capital gains taxes, is essential for making informed investment decisions.

• UTI Medium to Long Duration Fund Direct Growth: UTI Mutual Funds, ₹500
• SBI Magnum Gilt Fund Direct Growth: SBI Mutual Funds, ₹5,000
• ICICI Prudential All Seasons Bond Fund Direct Plan Growth: ICICI Prudential Mutual Funds, ₹5,000
• Nippon India Ultra Short Duration Fund Direct Growth: Nippon India Mutual Funds, ₹100
• ICICI Prudential Corporate Bond Fund Direct Plan Growth: ICICI Prudential Mutual Funds, ₹100

Overall, long-term debt funds offer a relatively safe investment option with moderate returns. They are suitable for investors seeking regular income, conservative investors, and those looking to balance their portfolio with fixed-income securities.

Frequently asked questions