Category Archives: Finance

In the age of growing volatility across financial products, currency fluctuation over the years has been no different. The Indian rupee also had its share of wild fluctuations against the US Dollar. For the ones who are not aware - Indian Rupee has depreciated to the tune of 61% in the past ten years, 11% in the past five years, and 4% in 2020 (year-to-date) against the US Dollar (all data as on November 30, 2020). With the generation having global aspiration, such weakening local currency leads to higher pay-outs or direct losses when the liabilities are in US dollars, or the payments are in US dollars for the services availed.  A declining rupee against the USD is a spoilsport for Indians looking to travel abroad. It hits the budget of parents looking to send their children abroad for global quality education. Not just that, the imports get costlier, which result in rising prices of gourmet and related items.  Let us understand this with the help of an example, a simple case study – Let us assume, that Mr. Bhandari invests Rs 35,000 per month in Indian Mutual funds which are likely to generate 12% returns (annually). He also links his SIP to his salary increment and says that every year he will increase the investment by 7% (Step-up). In this case, the amount accumulated in 12 years (the time left for sending his child abroad for education for a bachelor’s degree) is Rs 1.45 crore. Let us now see how Bhandari can save using US assets. Assuming, Bhandari does a SIP of USD 500 every month and generates 11% returns (annually) while increasing SIP by the same value as before, he is likely to accumulate ~200K USD. Now, since the cost of education or the tuition fees is to be paid in the USD, the accumulated corpus can help Mr. Bhandari pay the college tuition cost and cover some living expenses too which accounts for a sizeable cost in the total education expense. Building dollar-dominated assets We believe, that investing in foreign assets helps the individual diversify their portfolio to cover the risk associated with volatile/fluctuating economic conditions in their home country. This is achieved because the investor tends to spread out the assets across geographies rather than sticking to conventional asset classes like domestic equities, debt, and commodities. It is always advisable to have some investments in international stocks or assets. Let us now compare the returns from the dollar and Indian indices -  Over the past ten years (as on Nov 30, 2020), the INR has depreciated by 61% (~5% CAGR) in terms of the US Dollar. At the same time, the US market has grown 169% (10.4% CAGR). Compare it to S&P BSE Sensex - which during the same period has grown 126% (8.5% CAGR). Source: Yahoo Finance, EduFund Research Even if India outperforms foreign markets, the lack of perfect correlation between different markets reduces portfolio risk. Are you worried about the small portfolio including a foreign asset class? You don't need to worry if your portfolio is relatively small. You can always invest in foreign stocks through a mutual fund registered in India or through US ETF, which is made very simple with the help of digital transactions. Investing in foreign assets shifts risk and acts as insurance against any wild swings that the domestic market may see. Under the liberalized remittance scheme (LRS), Indian residents are allowed to invest up to USD 250,000 annually in foreign stocks, bonds, and ETFs. While the money transfer to a foreign broker has involved a bank branch visit, however, the FinTechs in the space are gradually easing up the process by offering pickup and drop services for transfer forms. Besides, banks such as ICICI Bank allow a completely online process for transfers up to $25,000 - 10% of the total LRS limit. This has made investing simpler for people who aspire to invest in US Dollar as a class. It typically will help people looking to travel abroad, and/or looking to send their child abroad for education. Conclusion: ‍Building your corpus whether it be to settle abroad or send your children for education is a step that you have to take in order to secure yourself your child's future. Remember that planning fares well and your financial future is for you to build. So plan, strategize and invest wisely. FAQs Should I save in dollars or rupees? Given the continued rupee depreciation against the dollar, buying US stocks from India can be beneficial for Indians in the long run. In fact, for parents who are saving for their child's future foreign education, saving in dollars would be better. How can I invest in US ETFs from India? Investing in US ETFs is now at your fingertips. Just download the EduFund App ➡️ Create an investor account by completing your KYC verification ➡️ Explore your options and start investing. What are dollar-denominated investments? Transactions priced in USD, securities, and assets are some of the dollar-denominated investments. TALK TO AN EXPERT

Remember the game of hiding & seek you must have played as a child? What was the strategy you implemented back then? Every member of the team should hide in a different place so that the seeker is not able to find all the players. In essence, this is what diversification is all about when it comes to investing. Let us see in detail the benefits of diversification - What is portfolio diversification? Portfolio diversification is the process in which you allocate some portion of the portfolio to different asset classes (such as gold, equity, etc.). Imagine you invested your entire portfolio in equities and Covid-19 happens. While the market started recovery a month after the correction but it dampens your liquidity and financial preparedness. So, what is the purpose of diversification? Simply put, the fundamental purpose is to minimize the risk on your investments; specifically, the specific risk associated with the market. How do you diversify? An investor can spread out investments by way of the following - 1. Spread out your investments Investing in equities is good, but that doesn't mean you should put all your wealth in the same investments. It would help if you also considered investing in other asset classes such as gold, real estate, fixed deposits, etc. 2. Explore other investment avenues Consider adding You could also add other investment options and assets to your portfolio. Mutual funds, bonds, real estate, and pension plans are other investments you can consider. Also, make sure that the securities vary in risk and follow different market trends. 3. Consider index or bond funds Adding index funds to your portfolio is a sound strategy to be with the market. These are highly cost-effective investment instruments. Merely investing in an index fund, your wealth would have grown 1.45x in 71 months (see chart below). Amount InvestedRs 7,10,000Amount AccumulatedRs 10,27,616Annual Returns, XIRR (%)12.38 Source: Value Research, EduFund Research 4. Consider adding foreign assets While India offers a great story of growth considering its young population, we cannot rule out the volatile currency of the economy. For goals such as sending a child abroad for education, you must diversify currency risk. The rupee has depreciated at 5% over 10 years, thereby getting devalued. Also, it is seen that USD-dominated assets have performed well over the years, generating 10% annual returns against Indian assets that generated 7%.   USD INR Date100 USD in Sensex100 USD in DJIA100 USD in Sensex100 USD in DJIASep-10100.0100.04598.64598.6Sep-20189.7257.513964.718959.1CAGR7%10%12%15%Note: CAGR – Compounded Annual Growth RateSource: Yahoo Finance, BSE India, EduFund Research Reasons for performance DJIA grew at 10% CAGR in past years ending Sep-2020 whereas Sensex grew at 7% CAGR during the period The rupee has depreciated at 4.8% CAGR over 10 years ending 2020 One of the significant and most important benefits of diversification is that the portfolio can absorb shocks during a market downturn. The risk gets evenly spread out across asset classes, and if you are saving for an investment, the likelihood of you getting derailed from your track gets minimal. Key Takeaways Diversification is a strategy that allows mixing a wide variety of investments in a portfolio. A portfolio can be diversified as per asset class both within the class and geographically Diversification helps in optimizing risk-adjusted returns FAQs Why is portfolio diversification important? Diversifying your portfolio helps you strategize your investment by lowering the risk and maintaining stable returns. Which mutual fund is more diversified? Some of the most diversified funds for 2023 are Edelweiss Focused Equity Fund (Growth), ITI Value Fund (Growth), Canara Robeco Focused Equity Fund (Growth), etc. What are the different asset classes for investment? The different types of asset classes for investment include - money market vehicles or cash equivalents, commodities, stocks, real estate, bonds, and cryptocurrency.

The Indian market, after touching an all-time high in February 2020 plunged to Covid-19 outbreak. The market has corrected significantly since then but has managed to regain its earlier levels last month. Despite the ride where the short-term movement was significantly strong, the fund manager has been unable to outperform the benchmark. NSE Nifty 50 performance in 2020 Source: Investing.com While the market has come back to pre-Covid levels, it provided multiple opportunities for active funds to generate alpha (higher returns against the benchmark). Let us see how the active and the passive funds performed during the short-term and the long-term in the Indian market. The SPIVA (S&P indices versus active) report compares the performance of the actively managed fund, and passive funds over the multi-trailing period of over 1 year, 3-year, 5-year, and 10 years. The H1 of 2020 remained volatile, whereby the large-cap benchmark (S&P BSE 100) corrected by 14.39%. During H1, there was a sharp correction in Q1 of CY2020, followed by a strong rebound in Q2 of CY2020 with the benchmark index rising 20% with support by the economic relief package and easing monetary policy. The investors during the period tactically shifted their allocation from equity to fixed income. First Half 2020 Average Fund and Index Performance Note: Data as of June 30, 2020Source: S&P Dow Jones Indices LLC, Morningstar, and Association of Mutual Funds in India. Considering the SPIVA report, the fund managers have been unable to outperform the benchmark. Over H1 2020, 45.16% of the funds underperformed the S&P BSE 100. The underperformance, of fund managers, holds true in the case of the long-term horizon. Over longer horizons, the majority of the actively managed large-cap equity funds in India underperformed the large-cap benchmark, with 67.67% of large-cap funds underperforming over the ten years ending in June 2020. Over the same period, Indian large-cap funds witnessed a low survivorship rate of 65.41%.  Percentage of Funds Outperformed by the Index (Based on Absolute Return) over the long-term Note: Data as of June 30, 2020Source: S&P Dow Jones Indices LLC, Morningstar, and Association of Mutual Funds in India. How should investors behave if they are chasing a goal? Let us now see how could you invest. It goes on without saying that an active fund comes with a higher expense ratio which goes toward fund management and other related costs. On the other hand, the expense ratio for passive funds has remained low, given there is an underlying benchmark to mirror and active share is negligible. We, at EduFund, believe that an investor should not chase alpha as doing that may derail the person from his/her investment objective. Instead, he should explore the possibility of going ahead with cheaper passive funds to get the cost-benefit and also better risk-adjusted returns. We believe while an investor should have exposure to active funds but going all-in into active funds may not be the right strategy. We believe an investor can have a balance between active and passive to ensure that the risks are minimized. Let us see the performance of an Active fund and a Passive fund – Assuming you invest Rs 10,000 in SBI Bluechip Fund (Direct plan, Growth option) and the same amount in SBI Nifty ETF, you tend to accumulate a higher amount in the other case as compared to the former. Note: 1- SBI Nifty 50 ETF, 2 – SBI Bluechip Fund Direct Plan, Growth OptionSource: Morning Star To cut the story short, if you are chasing an objective such as - global quality education for your child, it is imperative you need to keep aside a hefty amount towards the goal. While you will be exposed to the active risk while investing in an actively managed mutual fund, you will also be exposed to currency risk where the rupee is depreciating against the dollar. So, in such scenarios instead of dealing with multiple risks for one objective, you should consider investing passively in an Index fund and even then, would be able to achieve the corpus for your objective. FAQs What are the main risks that one should consider to not compromise on an investment goal? The risks to consider while investing include - Dividend Risk, Call Risk, The Bottom Line, Political Risk, Business Risk, and Allocation Risk. What are the factors that affect your investment decision? These are the factors that influence your investment decision - maturity period, frequency of returns, tax benefits, associated risks, inflation rates, and volatility. What's the biggest risk for investors causing them to compromise on their goal? The price fluctuations in the market affecting the price of commodities, securities, and investment fund shares often cause investors to take impulsive decisions out of fear. Because of this, they may end up compromising on their goal.