HNI’s Investment Preferences May Not Change With Because Of Rupee Movements
A domestic investor who invests into overseas markets, in addition to the market risk, assumes a currency risk as well
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Investment preferences of HNIs, like it is with any other category of investors, actually flows from their basic risk profile and the asset class preferences based on that. Investor preferences have a scientific basis and that is not something that easily changes with the passage of time or promise of returns. In fact, this is more true of HNIs compared to other investor groups.
One of the exogenous factors that may have a bearing on investment choices is the value of the domestic currency against the US Dollar or any other foreign currency. There are two aspects to it. In case of a substantially weaker Rupee today, it is essentially beneficial only for an investor who has already made the investments at some point of time in the past, as he may realize higher amount of Rupees on repatriation of the sales proceeds of the investments today.
But the more dynamic aspect is the second one- the future course of the Rupee. If the Rupee is relatively stronger today and if it is likely to depreciate in future, it makes immense sense to buy Dollar denominated assets moving out of Rupees.
One word of caution at this juncture. It is not the level of expected depreciation of the Rupee that should form the basis of the investment. The basis should only be the expected returns from the instrument or the asset class, the suitability of the product for the investor’s risk profile, the country view etc. among a few other things So it is fundamental factors that drive the decision to invest or not. The Rupee depreciation is just the icing on the cake. That alone will not be a sufficient reason for one to invest abroad.
The HNI investments abroad was close to $2.80 billion in 2017, and it is at US$ 3.50 billion in 2018, roughly a 25 per cent growth in the investments. The money invested into international funds of mutual funds have remained at more or less the same levels in the last two to three years, Rs. 1500 Crs on an average in the last three years. Those who were invested into US Dollar denominated funds have gained much on the basis of the buoyancy in the US equities in the light of the fast growth in the economy.
HNIs look at real estate or property too but to a very limited extent, probably, less than 2 per cent of HNI investments go into real estate abroad. Significant number of them prefer Dubai and London locations as these are places they usually travel to, and easy access as well as familiarity with the local language and systems. There is general agreement that over the next three decades India is poised to be one of the top three economies of the world and also having some of the fastest growing cities in the world, real estate too has a better scope for appreciation here. There is also a trend of HNIs spending quite a bit on their children’s education in prestigious universities abroad and this trend as reported by some of the leading advisors, is on the rise. In that context, the investments are made in a foreign currency in which future expenses are to be incurred, thereby ensuring a currency hedge.
A domestic investor who invests into overseas markets, in addition to the market risk, assumes a currency risk as well. Are the returns sufficiently high to justify the exposure with the additional risk? Only if the answer is yes, an investor may look at multi-currency exposure.
Ultimately, the underline fact is investments are based on fundamentals and return expectations, and currency depreciation should not be a significant consideration though it may be a valid but limited consideration.
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