The weakening rupee and mutual fund returns

In the last few months, mutual fund investors have been witnessing the consistency in the losses from their mutual fund investment. You must have heard many times, of late, that the Indian markets are falling due to weak global cues or due to macroeconomic aspects. But many investors have difficulty understanding what is the exact relation between Indian rupee's value and the dollar movement and also how these aspects affect the Indian markets as a whole and mutual fund returns, in particular. So let us explore how the rupee depreciation can impact mutual fund returns.

The movement of USD/INR always impacts Indian markets. If we observe the trend for the last 10 years, we can see that whenever Indian rupee appreciates against the US dollar the market moves upward and at the same time when Indian rupee depreciates the market falls. Here is the price movement for the rupee for the current year from January 2018 onwards.

In the current situation, the weakening rupee has hit the benchmark indices thereby mutual fund returns. This is the case with the equity funds. But in the case of the funds which are investing in the international securities, rupee depreciation can be good. Further, export-oriented sectors are also expected to benefit from the rupee depreciation. Pharma and IT sectors are expected to be the primary beneficiary of this depreciation. So the funds which are focussed on these sectors are expected to benefit from this situation.

Besides this, the rupee depreciation environment keeps bond yields at a higher levels which further forces the increase in the interest rate which can hurt the returns from the long duration debt funds and at the same time the situation will be beneficial for short term debt funds. So in all these ways, the rupee depreciation affects the mutual fund returns over a period of time.