Let’s say you invested ₹10 lakhs in an international mutual fund when the exchange rate was ₹75 per US dollar. Fast forward a year, and the rupee weakens to ₹85 per dollar. Sounds like good news, right? Not always.
While the fund’s value increased due to currency changes, your expenses back home also rose. Hedging protects your portfolio from such risks.
Did you know that in 2023, the Indian rupee fluctuated by over 8% against major global currencies like dollars? These swings can erode your portfolio gains. You can protect your returns and peace of mind by taking simple steps like using forex hedging tools or diversifying your investments.
Understanding Currency Risk
Currency risk is the possibility of losing money due to currency exchange rate fluctuations. Let’s say you imported goods worth ₹5 lakhs when $1 = ₹80.
But by the time you pay, ₹ has weakened to ₹85 per dollar. That’s an additional ₹25,000 out of your pocket.
There are three types of currency risks:
- Transactional risk: Direct exposure during cross-border payments.
- Translational risk: Impact on asset valuations due to currency shifts.
- Economic risk: Long-term effects on competitiveness or revenues.
Even personal loans taken in foreign currencies can expose you to transactional risks if the rupee depreciates. Hedging helps to tackle these uncertainties.
Top Strategies to Hedge Against Currency Fluctuations
Forex Options and Futures: A Reliable Shield
Forex options and futures are powerful tools for managing currency risk. Suppose you expect the rupee to weaken in six months. By locking the current ₹80/$ rate in a forward contract, you avoid paying more if it rises to ₹85.
- Example: You commit ₹4 lakhs in USD today for future payment. If the rupee weakens, you save up to ₹20,000!
Diversifying Across Currencies
Holding assets in different currencies reduces risk. A well-diversified portfolio balances returns even when one currency underperforms. For instance:
| Asset | Currency | Initial Value (₹) | Post-Shift Value (₹) |
| US Stocks | USD | 3,00,000 | 3,50,000 |
| Euro Real Estate | EUR | 4,00,000 | 4,40,000 |
| Asian Equities | JPY | 2,00,000 | 2,05,000 |
| Gold ETFs | INR | 1,00,000 | 95,000 |
Diversification spreads risk while capturing growth across global markets.
Hedging with Currency-Hedged ETFs
These ETFs neutralise currency risks by using in-built hedging mechanisms.
- Easier than managing forex directly.
- Cost-effective for small investors.
- Examples: Global funds offering hedged versions.
Additional Tips:
- Avoid hedging all investments at once. Assess exposure first.
- Monitor currency market trends regularly.
- Consult experts when unsure.
Natural Hedging: Aligning Costs and Revenues
If you earn in USD and spend in USD, you minimise exposure. For businesses, keeping imports and exports in the same currency offers stability. Investors can replicate this approach by aligning investments with local currency dynamics.
Example Scenario:
- Your export revenue: $50,000 (₹40 lakhs).
- Import costs: $45,000.
- Hedge only $5,000 for profit stability.
Simple, effective, and affordable!
Common Mistakes in Currency Hedging
Hedging isn’t foolproof. People often:
- Over-hedge and miss potential gains.
- Neglect rising transaction fees.
- Use products unsuitable for their risk tolerance.
Instead, start small and learn as you go.
Benefits of Hedging: Why It’s Worth It
A hedged portfolio ensures:
- Stable returns despite market chaos.
- Lower stress during volatile periods.
- Predictable cash flows for financial planning.
Whether you have mutual funds, personal loans, or business investments, proactive hedging boosts confidence and protects wealth.
Conclusion
Currency hedging is not just a strategy; it’s a necessity in a globalised world. Protecting your investments—be it stocks, personal loans, or business transactions—requires thoughtful planning and action.
As Warren Buffet says, “Risk comes from not knowing what you’re doing.” So, are you ready to secure your portfolio against currency fluctuations today?
FAQs
- How do currency fluctuations affect personal loans?
If the loan is in a foreign currency, repayments rise with rupee depreciation. - Is hedging only for large portfolios?
No, small investors can hedge with ETFs and forward contracts too. - How much does currency hedging cost?
Fees range from 0.5% to 1% of the hedged amount, depending on the tool used. - Can I hedge my portfolio myself?
Yes, but consulting a financial expert ensures better decisions.
