Jumpy Re: Right time to send money to India?
The Economic Times - part 3
The case of dealing with a historical exposure is like determining the right proportion of currencies that you should have in your portfolio.
By Akhilesh Tilotia & Ramganesh Iyer
In the last two articles of this three part series, we brought to you a perspective on the movement of the rupee vis-à-vis the dollar and how the relationship between the two currencies is undergoing a change and a few factors NRIs need to consider to manage their foreign currency earnings better.We conclude the three-part series with tips on how to take care of the foreign currency exposure that you have.
We saw the last time that the Indian currency is ‘jumpy’ and that the direction of the ‘jump’ is getting increasingly harder to predict. There are more opinions than experts on the value of the Indian rupee going forward. We also saw some factors to consider while planning your investments. How do you then take care of the foreign currency exposure that you have?
Types of foreign exchange exposure
Before we deal with the strategy of foreign exchange risk management, lets us understand the two types of foreign exchange exposure inherent in anyone’s portfolio.
Historical or lump-sum exposure: You have worked for so many years in a foreign shore and have built for yourself a home there, a large retirement corpus which is kept in the local currency there, you have invested in local financial instruments (fixed deposits, shares, mutual funds, etc), all of which are denominated in the local currency. If you were to list all your assets today, these assets might form a large part of your net worth today. This exposure is what we can call the “historical or lump-sum exposure”.
Flow exposure: The money that you earn on a regular basis is your “flow exposure”. It refers to the salary, income, interest or dividends that you earn in the local currency in a foreign land.
One important item to note is the relative importance of the historical exposure vis-à-vis the flow exposure. In case, you have stayed long enough (in the context of your working life) in a foreign land, you will have developed a much larger historical exposure. If you are young and have recently emigrated, you would possible have more to worry about the flow exposure than the historical exposure.
How do I deal with my historical exposure?
The case of dealing with a historical exposure is like determining the right proportion of currencies that you should have in your portfolio. This is akin to the diversification that is spoken of, for example, in the equities markets. You should not hold all your eggs in one basket, but you should determine the right proportions to be distributed across the various baskets. You need to have the right “asset allocation”.
Look at your portfolio and your milestones. Are they both denominated in the same currency? Will you be using a portion of your historical wealth for this milestone? Also, will the expenses be primarily denominated in the local currency or in a foreign currency? You should build your corpus such that around the time of the milestone, you have the right amount in the right currency.
For example, consider the marriage of your children. If you want to marry your children in the USA, then you need to invest in dollars; if you want to marry them in India, then your portfolio should have Rupee exposure. Similarly, if you plan to spend retired life abroad, your retirement corpus should be saved in that currency; while if you plan to spend retired life in India, you are better off converting all wealth to Rupees as and when possible and investing in Rupee assets.
In most cases, after the milestones are met, the surplus capital is typically left aside for growth objectives. It is here that the concept of diversification plays a crucial role. Your portfolio should have a wise mix of various currencies so as to protect you from a sudden adverse movement in any one currency. Typically, you should consider taking an exposure in unrelated currencies, but that is a discussion you should have with your financial advisor.
In order to diversify the concentrated currency exposure of one of our clients, we are helping his raise a loan against his home in the USA and will be helping him invest in Indian rupees. Note that since both his home and loan will be in dollars, he is perfectly hedged.
If the value of the Rupee against the Dollar rises (as has happened recently), then the home value will fall (in Rupee terms) and so will the amount (in Indian Rupees) he has to pay against the loan. The money so released from the value of his home, can now be deployed in the Indian currency, helping his reduce the concentration of dollars in his portfolio.
How do I deal with my flow exposure?
After you have considered - and implemented - the diversification of your historical exposure, you should consider managing your flow exposure.
Here the idea should be to define the objective of your investment. Once you have defined the destination, you can now choose the road. Assume that the reason you are saving is to come back to a comfortable retirement in the hills of Darjeeling or Dehradun. In that case, you need to gradually and continuously build a corpus to achieve that end.
Since the idea, in this case, is to return to India and purchase an Indian property, you should consider building a corpus in Indian rupees. However, given the jumpiness of the Indian rupee, you would wonder on what the right time is to send the money to India.
This is where we borrow from the systematic investment plans that are a rage in the equity markets. Since it is almost impossible to time to market, you should keep sending the money on a regular basis. As they say in equities, it is not the timing of the market, but the time in the market, that gets you the best return.
If you keep investing small sums of money across a different currency, you benefit by getting the ‘average’ rate for that currency. You do not take a one-time risk (which can either significantly benefit or hurt you). Given that investing regularly is more disciplined and does not require thought every time, you are not struck by paralysis-by-analysis every time you have to move your money. Sudden jumps in the value of the currency will not (as they, should not) bother you every time you want to take a decision.
Conclusion
Across financial markets, the fundamental laws are same - and simple! What wavers is our ability to implement those laws, either due to fear or greed. If the fundamental laws are mastered, there is no reason why you cannot achieve the best in any financial market, including currencies.
Akhilesh Tilotia & Ramganesh Iyer
CFP(CM) & IIM, Ahmedabad, Park Financial Advisors
The case of dealing with a historical exposure is like determining the right proportion of currencies that you should have in your portfolio.
By Akhilesh Tilotia & Ramganesh Iyer
In the last two articles of this three part series, we brought to you a perspective on the movement of the rupee vis-à-vis the dollar and how the relationship between the two currencies is undergoing a change and a few factors NRIs need to consider to manage their foreign currency earnings better.We conclude the three-part series with tips on how to take care of the foreign currency exposure that you have.
We saw the last time that the Indian currency is ‘jumpy’ and that the direction of the ‘jump’ is getting increasingly harder to predict. There are more opinions than experts on the value of the Indian rupee going forward. We also saw some factors to consider while planning your investments. How do you then take care of the foreign currency exposure that you have?
Types of foreign exchange exposure
Before we deal with the strategy of foreign exchange risk management, lets us understand the two types of foreign exchange exposure inherent in anyone’s portfolio.
Historical or lump-sum exposure: You have worked for so many years in a foreign shore and have built for yourself a home there, a large retirement corpus which is kept in the local currency there, you have invested in local financial instruments (fixed deposits, shares, mutual funds, etc), all of which are denominated in the local currency. If you were to list all your assets today, these assets might form a large part of your net worth today. This exposure is what we can call the “historical or lump-sum exposure”.
Flow exposure: The money that you earn on a regular basis is your “flow exposure”. It refers to the salary, income, interest or dividends that you earn in the local currency in a foreign land.
One important item to note is the relative importance of the historical exposure vis-à-vis the flow exposure. In case, you have stayed long enough (in the context of your working life) in a foreign land, you will have developed a much larger historical exposure. If you are young and have recently emigrated, you would possible have more to worry about the flow exposure than the historical exposure.
How do I deal with my historical exposure?
The case of dealing with a historical exposure is like determining the right proportion of currencies that you should have in your portfolio. This is akin to the diversification that is spoken of, for example, in the equities markets. You should not hold all your eggs in one basket, but you should determine the right proportions to be distributed across the various baskets. You need to have the right “asset allocation”.
Look at your portfolio and your milestones. Are they both denominated in the same currency? Will you be using a portion of your historical wealth for this milestone? Also, will the expenses be primarily denominated in the local currency or in a foreign currency? You should build your corpus such that around the time of the milestone, you have the right amount in the right currency.
For example, consider the marriage of your children. If you want to marry your children in the USA, then you need to invest in dollars; if you want to marry them in India, then your portfolio should have Rupee exposure. Similarly, if you plan to spend retired life abroad, your retirement corpus should be saved in that currency; while if you plan to spend retired life in India, you are better off converting all wealth to Rupees as and when possible and investing in Rupee assets.
In most cases, after the milestones are met, the surplus capital is typically left aside for growth objectives. It is here that the concept of diversification plays a crucial role. Your portfolio should have a wise mix of various currencies so as to protect you from a sudden adverse movement in any one currency. Typically, you should consider taking an exposure in unrelated currencies, but that is a discussion you should have with your financial advisor.
In order to diversify the concentrated currency exposure of one of our clients, we are helping his raise a loan against his home in the USA and will be helping him invest in Indian rupees. Note that since both his home and loan will be in dollars, he is perfectly hedged.
If the value of the Rupee against the Dollar rises (as has happened recently), then the home value will fall (in Rupee terms) and so will the amount (in Indian Rupees) he has to pay against the loan. The money so released from the value of his home, can now be deployed in the Indian currency, helping his reduce the concentration of dollars in his portfolio.
How do I deal with my flow exposure?
After you have considered - and implemented - the diversification of your historical exposure, you should consider managing your flow exposure.
Here the idea should be to define the objective of your investment. Once you have defined the destination, you can now choose the road. Assume that the reason you are saving is to come back to a comfortable retirement in the hills of Darjeeling or Dehradun. In that case, you need to gradually and continuously build a corpus to achieve that end.
Since the idea, in this case, is to return to India and purchase an Indian property, you should consider building a corpus in Indian rupees. However, given the jumpiness of the Indian rupee, you would wonder on what the right time is to send the money to India.
This is where we borrow from the systematic investment plans that are a rage in the equity markets. Since it is almost impossible to time to market, you should keep sending the money on a regular basis. As they say in equities, it is not the timing of the market, but the time in the market, that gets you the best return.
If you keep investing small sums of money across a different currency, you benefit by getting the ‘average’ rate for that currency. You do not take a one-time risk (which can either significantly benefit or hurt you). Given that investing regularly is more disciplined and does not require thought every time, you are not struck by paralysis-by-analysis every time you have to move your money. Sudden jumps in the value of the currency will not (as they, should not) bother you every time you want to take a decision.
Conclusion
Across financial markets, the fundamental laws are same - and simple! What wavers is our ability to implement those laws, either due to fear or greed. If the fundamental laws are mastered, there is no reason why you cannot achieve the best in any financial market, including currencies.
Akhilesh Tilotia & Ramganesh Iyer
CFP(CM) & IIM, Ahmedabad, Park Financial Advisors
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