Forex Variations : Implications to Portfolio

When it comes to choosing which Mutual Fund to invest in, there are a number of parameters based on which people make decisions. One of the most prevalent , even though unscientific parameters is Historical Returns. So assuming that you have to decide one mutual fund out of below two funds - based on last 5 year returns - which one will you choose?

Fund Name	Five Years Annualized Returns
Pictet Water P USD Fund	13.79%
Birla Sun Life Frontline Equity Fund (Regular Plan) - G	18.39%

*Performance as on 10th Sep’16. Source Morningstar.co.uk and moneycontrol.com

Please note that Pictet Water P USD is a $ (USD) denominated fund while Birla Sun Life Equity Fund is denominated in Indian Rupee (INR).

Needless to say you will choose Birla Sun Life Frontline Equity Fund (Regular Plan) - G based on its performance which is around 5% better than that of Pictet Water P USD Fund. Now if I tell you that 5 years back US Dollar was trading at 47.80 against Indian Rupee  while today’s exchange rate is 66.59, will that bring any change of heart to you? If this rate fluctuation doesn't ring any bells in your mind, read the below analysis.

Let's assume that 5 years back you had 10,00,000 INR investible surplus and you had invested 5,00,000 each in the above two funds.So lets evaluate both funds’ performance one by one.

First let's analyse Pictet Water P USD Fund. As it is denominated in USD , so we can invest in it in USD only. We are assuming a level of 47.80 (which was recorded on 13th Sep, 2011) of INR against USD for exchange rate five years back. That means we invested $ 10460.25 in it five years back. At a return rate of 13.79% growth for last five years , this investment should grow to a value of $ 19955.5 in today’s (10 Sep’2016)  date.

Now let's analyse Birla Sun Life Frontline Equity Fund (Regular Plan) - G in a  similar manner. As it is denominated in INR so 500000 INR invested five years back growing at a rate of 18.39% for five years , will grow to INR 1162907 in today's date.

So 500000 INR invested in each of them 5 years back grows to $ 19955.5 (Pictet Water P USD Fund) and INR 1162907 (Birla Sun Life Frontline Equity Fund) in today’s date. To compare them on a level ground we should convert both of them in same denomination. Let’s convert both of them to INR. So at today (10th Sep’2016)’s exchange rate of 66.95, Pictet Water P USD Fund’s corpus is equivalent to INR 1336021, which is 14.68% more than Birla Sun Life Frontline Equity Fund’s corpus of INR 1162907.

What the above case study means is that foreign exchange fluctuations can bring substantial gains to your portfolio even if underlying assets (mutual funds in above case) have lower returns per se. The implicit message in the above case study was that INR has depreciated by more than 6% (compounded ) against USD per year for last five year. So a very crude form of thumb rule means that at same level of returns in respective currencies, USD denominated returns will beat INR denominated returns by 6%.

In India we resort to diversification in our portfolio at asset class level only , i.e. taking exposure to different kinds of Mutual Funds, Fixed Deposits , Small Saving Schemes etc. But geography and currency diversification hardly make their presence felt. Unfortunately very few options are available in India for taking global and currency diversification, that too with constraints like unfavorable tax treatment and large amount of initial investment. Still a smart and shrewd investor should always be on look out for those channels which can help in bringing currency and geographical diversification to your portfolio.

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Shifting to New Shores : An NRI's Guide to Finances

One of the biggest changes brought about by globalisation has been  the huge amount of manpower movement across national boundaries. The first wave of Industrialisation made national boundaries fluidic for manufactured goods. But next wave of progression made humanity realize the importance of Services sector in overall economic development and better standard of living. It was this phase which facilitated the movement of manpower beyond national boundaries as services needs to be delivered at the point of consumer.

Hordes of people move to foreign lands every year in hopes of better lifestyle, career progression and higher level of savings. In the process we trade off our culture, family bonds and safety of our country.

So recognising the huge level of manpower movement across boundaries, we take a holistic view of how migration can and should affect your life in general and finances in particular.

Lets start with major costs involved when we move to a new country.

Before Shifting : -

Passport 

In case you plan to move with family, do ensure that passports of everybody is in place and updated well in advance. Though cost of Passport is not much of an amount and thanks to automation and facility of Tatkal, it has become less of an headache, still rules and complication can prove to be a dampener. Like for example, for issuance of passport of a minor, both parents have to be present in person at the passport office. So don't plan to leave the country before getting the same in place, trusting your spouse to take care of it. 

Visa

We Indians are habitual of paying pittance when it comes to availing government services and assume the same about Visa fees. But Visa fee can prove to be a major dent in your pocket , based on the country that you plan to shift to. So better check about Visa costs well in advance both for yourself and for the family.

After Shifting [One Time Expenses] :-

Local Documents

Like Aadhaar in India , many countries have their biometric/non-biometric ID cards required for expats. Sometimes employer decline to reimburse the cost of it for the employee and family. So do check about the same first hand from your employer.  

Medical

We in India have comparatively cheaper medical facilities (based on purchasing power parity i.e. our earnings). But sadly case is not so in many first world countries. Even in a supposedly advanced nation like USA, medical expenses form a major part of a family's expenses. Most times, employer provide medical cover for the employee and the family. Otherwise do plan medical cover for your family ASAP so that you are better prepared for any eventuality in a foreign land.

Rentals and Accommodation

Shifting to a new place brings with it whole lot of expenses related to accommodation, some of which are -

·         Rental advance and security

·         Appliances

·         Furniture

·         Kitchenware

While rentals and security are on higher side  [as compared to earnings], fortunately appliances and furniture is cheaper as a proportion of one's salary in most of the first world countries.

After Shifting [Recurring Expenses] :-  

Travel

Thanks to high airfare travelling to and fro the native country is a big annual expense no matter in which part of the world you live. One can mitigate the same by checking the trend of airfare and planning one's travel during the off season rates.  

Education

Children's education is another struggle both because of high fee and high admission criterion. Best is to try to take advice of those parents who have been living for long and hence knows the intricacies of admission process and quality of schools.

 Before Closing, I will delve upon two very critical learning for Expats -  

·         Never compare costs of foreign land by forex rate. Rather compare them taking in view your salaries.I will elaborate with an example. 

Zoheb who was working with HDFC bank in India at a monthly take home of 85000 INR shifted to work for a bank in Dubai earning a monthly salary of 17000 Dhiram (local currency of Dubai). A Dhiram is approximately equivalent to 18 INR as per forex rates.

Now Zoheb decides to buy a sofa set. After much pondering he zeroed in one at Ikea store whose price was 5000 Dhiram. As per Zoheb similar sofa would have cost 50000 INR back home in India, while as per forex rates it was costing him 90000 (18X5000) INR in Dubai. So Zoheb concluded that furniture was expensive in Duabi in comparison to India.

But Zoheb was wrong in his conclusion because though Forex Multiplier (number of times a unit of foreign currency is, in comparison of Indian currency i.e. INR) was 18, his salary multiplier (i.e. number of times his salary in Dubai is that of his salary in India) was only 5 [85000/17000]. Hence he should multiply cost in Dubai by 5 to make a justified comparison, because expenses should be compared with earnings not forex rates.  

·         The Initial On-boarding expenses are monumental as we take care of the same from our Indian savings which are in INR and hence are generally very low because of currency rates. A corpus of 500000 INR may look high in India but if you convert it into $, its only about $ 8300 which can sustain only for 3-4 months in an USA city. But once you have 3-4 salaries in your tow, then comes the real windfall of savings, as then you are on other side of the currency rates and make huge savings in INR. Hence the initial on-boarding expenses should be treated as investment for long term savings.  

In addition to finances, our lives get affected in numerous ways when we throw our anchor at foreign shores. While many parameters like local culture, food, pollution levels etc are beyond the ambit of our control, our personal finances are something that we can take good control by a little bit of planning and meticulous execution.

Click here to learn about the pros and cons of NPS and PPF.

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Year Review 2015

As 2015 comes to a dawn let’s do a quick analysis over how this year was in terms of investment and taxation. We will try to list all the big changes in taxation and a brief summary on how asset classes performed during this year. Lets start with changes in income tax rules

1. Govt declared Rs 50,000 additional deduction under section 80CCD. So now you can save up to 50,000 Rs in NPS and claim tax benefit on this income.
2. Govt doubled transport allowance amount to Rs 1600 Per month from earlier 800 Per month

There were several other minor changes in Tax codes but those were minor ones.

Now coming to various asset class and their performance in past year

Equities: 2015 was supposed to be one big year for equities after euphoric 2014 when SENSEX returns were massive 40%. 2015 was supposed to be an year when corporate earnings will pick up after somber of 2 years, but nothing like that happened actually and equities suffered. This year Sensex and Nifty started year at 27,900 and 8,400 levels and grew 5% in Jan to levels of 29,500 and 8900 respectively before bears became dominant and remain rangebound for whole year. Both the indexes are ending the year down about 6-7%. There were few bright spots in between large disappointments with midcaps giving positive returns of about 6-7%. Overall 2015 have been a disappointing year as far as Indian equities are concerned

Debt: As RBI reduced interest rates debt instrument yield came down and hence prices increased. Overall return of 8%-8.5% were best return available during the year as equities faltered and Gold, reality etc failed to pick up.

Gold: Gold (and all other commodities) remained depressed during 2015. It means Gold have been depressed since last 3 years and there is no revival in sight. But Gold saw some action in terms of some new and very exciting schemes from Govt. More details here.

Real Estate: Real Estate too remained depressed in 2015 with some minor exception. It have also been a 3-4 year phase of consolidation and full scale revival will still take time. Though as credible data is unavailable making sweeping recommendation about this market is difficult but some money have been made in certain pockets but overall market have been subdued.

Overall 2015 was not that good year as far as returns are concerned but it provided a good consolidation which will yield to better results in years ahead