Recently, a friend called me to check on a long-term foreign currency investment that was pitched to him. His reason: his son would go to the USA for higher education. The cost of education would be in dollars. So, he wanted to ensure that he invested in dollars, and wasn’t caught short due to the depreciation of the rupee vis-a-vis the dollar.
When I saw the details, I realised he was being pitched a dollar-denominated endowment life insurance policy. Like the Indian endowment life insurance policies, it was a terrible product with long commitment timeframes, low surrender values and just principal guaranteed on maturity. Only the agent selling the policy was making money in the bargain. But this encounter set me thinking.
Most middle-class families aspire to send their children overseas (primarily to the US) for higher education. In their view, the necessary corollary to that is to make sure that they invest in dollars so that they have enough to pay for the education expenses of their child. This reason is entirely incorrect.
A simple example will illustrate this. Let’s say the amount required in May 2018 for the child’s education is $100,000 (approximately Rs 6.8 million at an exchange rate of Rs 68/$). Ten years ago, you would have had a choice to convert your rupees into dollars and invest in the US markets or let it remain in the Indian markets and buy the dollars in 2018.
The 10-year moving average return from January 1, 2000 to May 8, 2018, of S&P is 3.68 per cent a year. The comparative 10-year moving average returns of the BSE Dollex 200 (measuring the dollar returns of the BSE 200 index) over the same period was 11.68 per cent. So, to get Rs 6.8 million, you would have had to invest Rs 1.4 million in the Indian stock market vis a vis Rs 3 million in the US market. Clearly, dollar investments aren’t necessary to fund dollar expenses, especially if you are well planned.
Of course, there is always the argument that geographical diversification is a good thing for investors because – well, the old adage – never put all your eggs in one basket. In principle, there can’t be an argument against this, but there are three critical factors that militate against investing in foreign currency-denominated instruments.
First, returns from Indian instruments, especially equities, have been consistently better. Two, they are more cost-effective. The third and most important reason – the Indian tax authorities. You will need to file separate income tax return forms giving full details of your foreign investments, even if you hold say only Rs 100,000 worth of foreign stock or have a foreign bank account. It also invites special scrutiny from the tax authorities.
If you are still keen on geographical diversification, you can look at mutual fund (MF) schemes which invest a part of their corpus in the-fancied FAAMG stocks (Facebook, Amazon, Apple, Microsoft and Google). Most leading fund houses have such schemes in their portfolio, and you should ask your advisor about them.
The writer is a Sebi-registered investment advisor