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At a time when the rupee is volatile, what to do with your investments

Author: Adhil Shetty/Wednesday, July 25, 2018/Categories: Financial Planning, Expert View

At a time when the rupee is volatile, what to do with your investments

Rupee has seen wild swings in the recent past given the trade war between US and China and the mismatch in demand and supply of crude oil. In fact, the one-month Bloomberg Implied Volatility Index stood at a 19-month high at 6.64 per cent in the first week of July.

This could be a matter of concern for investors, as the volatility of the rupee could result in higher inflation, thus eroding the value of the currency in the long term. Amid this volatility, let’s look at what you can do with your money to achieve your financial goals in time.

Stay invested for long

While the rupee volatility may not last for long, it’s important to invest with caution to ensure your money grows irrespective of the market conditions. SIPs involve disciplined investment every month. And, when you remain invested in mutual funds over a long period of time, the risk associated is mitigated.

When the market is down and the NAV is low, you can buy more units of a mutual fund and stay invested so that your portfolio stays close to the profit line. Once the value of INR stabilises and the economy adjusts to the new market condition, the investments will attain an attractive size. The power of compounding will only boost your sum with time. 

Rupee cost averaging helps

Under rupee cost averaging (RCA) you need to invest a fixed amount on a regular interval (monthly, quarterly, half-yearly basis). The cost of purchase averages out based on the market conditions. You buy fewer units of mutual funds when the NAV is going up and buy more units when the NAV is going down, thus averaging out the volatility. Let’s understand this with the help of an example.

Rupee cost averaging benefit of SIP

Month No

SIP Amount
(In Rs)

NAV

NAV movement

Unit

Note

1

1000

20

Nav increases

50.0

Number of unit purchase falls

2

1000

21

47.6

3

1000

22

45.5

4

1000

18

NAV falls

55.6

Number of unit purchased increases

5

1000

16

62.5

6

1000

14

71.4

7

1000

12

83.3

8

1000

10

100.0

9

1000

11

Nav again increases

90.9

Number of unit purchased again falls

10

1000

15

66.7

11

1000

18

55.6

12

1000

20

50.0

Total Investment

12000

 

 

779.0

 

Value of Investment after 12 months (In Rs)
(Assuming NAV to be 21)

15580.45

Annualised ROI (Approx)

29.84

* All figures are assumed for illustration

 

Stay invested in gold

Gold is a tested investment hedge against inflation. Therefore, when the INR depreciates against other currencies, you can park your money in gold to protect it from value erosion. When it comes to gold investment, you can either buy physical gold, invest in gold ETF or purchase Sovereign Gold Bond (SGB) for a long term. Investment in SGB can give you triple benefits i.e. interest on investment, capital appreciation and tax benefits if you stay invested until redemption.

Rebalance your portfolio

Prolonged market volatility requires you to rebalance your portfolio as per your financial goal and risk appetite. Say your equity to debt investment ratio was originally at 60:40. With market volatility, the ratio needs to be changed to 30:70. Likewise, when the market condition improves, your portfolio may be skewed toward equity and you may need to rebalance it by increasing the investment in debt instruments.

The writer is CEO, BankBazaar

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Adhil Shetty
Adhil Shetty

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