Dollar vs Rupee: Where to Invest?

26 May 2021  Read 1199 Views

If you traced the dollar rate back to independence, you wouldn't believe that the rupee was at par with the US dollar! If that rate prevailed now, you could have bought the latest iPhone for just Rs 1300! Or you could have added luxury cars like Porsche or Tesla to your collection at just Rs 1 Lakh! Unfortunately, that is not the case.

The US dollar has already exceeded the 70-rupee mark. And the rate is increasing consistently. It is currently trading at around Rs 73. And that brings a dilemma. Dollar vs Rupee: Where to Invest?

Well, don't worry. We've got you covered. You will get your query sorted by the end of this piece.  

Why should you invest in dollars?

The year 2020 proved to be historic for the Indian share market, with indices giving 100% return in just a year. Still, some people prefer not to restrict their investment in the country. They prefer investing globally to diversify their portfolios to the next level and to seize opportunities. As you might have known, "Nothing is more expensive than a missed opportunity."

So, as we were telling you, the Rupee has been depreciating against the Dollar ever since independence. The following graph shall serve as a timestamp for these 75 years -

Moreover, you would be shocked to know that the average rate of depreciation has been 3.5% annually! It means that you can earn extra returns as compared to US investors if you invest internationally.

For example, if the average returns for an American investor are 8%, you can get roughly 11.5% returns on the same investment! For the layman, it's like, say you buy a dollar today paying ~ Rs 70. Then, you invest the Dollar in some avenues, which earns you returns. Also, assuming the average depreciation of rupee in a year, your same Dollar could fetch you roughly Rs 73 (plus rupee equivalent of returns). So, that way, you earn extra on exchange rates besides the ROI.

And what if you had bought some millions of dollars, eh? Congratulations! You just discovered an investment hack.

Increasing demand for dollars

What's more, the Covid pandemic filled the bucket list with water. Or you can say that it made the most awaited Goa trip wait even longer. After the world is back to normal, people will go to any heights to explore the world.

Also, all of us have witnessed the cut-throat competition in education. General candidates do not even get invited for admission, even after securing 99 percentiles. That is why the 'deserving' students who don't become a part of prestigious institutes like the IITs and IIMs prefer to study abroad in a reputed university.

You may wonder why we mentioned all of that? It was to explain to you that the demand for the US dollar will rise in the future. So, investing in the Dollar is an apt investment avenue to get decent returns at low risk. After all, why not get sufficient returns to enjoy a foreign trip without bothering about the expenditure involved? Right?

Not just that, the remittances by Indians have increased. Even though the Indian Rupee has depreciated by 60% in a decade, remittances have risen 10x times in just the last four years! A pretty intense amount, right? But this is the reality we are living.

Anyways, were you clever enough to get a clue? It signifies that the demand for the Dollar has been rising substantially in recent years. It enables the opportunity for higher returns.

Adequate investing limit

The Reserve Bank of India recognizes the same. That is why it has allowed individuals to remit their money abroad. But there is a limit of $250k in a Financial Year, according to the Liberalized Remittance Scheme introduced in 2004. Beware that the above limit includes all the remittances. It includes gifts, expenditure on the trip, studies, medical treatment as well. So, plan your investments carefully so that you don't exceed the limit. Else, the penalties imposed may eat away your returns.

How to Invest in Dollars?

If you have read the above, you would realize the significance of foreign investments in your investment portfolio. Want to know the ways of investing globally? Let's get started.

  • International Stocks: All of us know about companies like Google, Amazon, Facebook, etc. What if we tell you that you can become a part-owner of these companies? You can do so by investing in international stocks through domestic in collaboration with a foreign broker. Or you can approach a foreign broker directly to avoid involving 'an extra broker'. It will help in getting more returns as compared to the former. 
  • Mutual Funds: Investing in international stocks sounds enthralling. But you may not be aware of the laws and the higher charges involved in international transactions. That is why mutual funds are considered the best investment route for global investing. It frees you from the troubles and is a cheaper alternative to investing in stocks.

For example, ICICI Bank allows you to transfer up to $25000 online. It has made foreign investing easy. Due to this kind of developments, you'd be shocked to note that -

Moreover, foreign indices have performed better as compared to the Indian ones. Additionally, considering the depreciation of the rupee, you will witness an enormous difference between them. So, a fund with a foreign index as the benchmark may outperform the other mutual funds.

  • Debt Instruments: Like its Indian counterpart, America has various debt investment options. You can invest in government and corporate bonds and other instruments to get moderate returns at low risk. 
  • Investing in the Dollar (Literally): Besides investing in equity and debt instruments, you can trade in the dollar currency as well. Like debt instruments, it has the potential of average returns without much risk. If the economic policies are export-oriented, the rupee will depreciate even further. It is to promote exports and discourage imports. So, investing in forex is appropriate in the long run. You can do it by opening a savings bank account or term deposits if you want to invest for a long time.

Conclusion

There are a plethora of options in the domestic market. Still, people prefer to invest abroad as well to diversify their portfolio further. The extra return from the depreciation of the rupee is the icing on the cake. In the present context, the vaccines developed by American companies like Pfizer and Moderna will increase imports from the US. So, it will lead to the strengthening of the US dollar.

You can invest in dollars through the direct route of equity and debt instruments, besides following the indirect way of mutual funds. 

In the end, remember to invest for the long term. As it is rightly said, "The big money is not in the buying or selling, but in waiting."

So, would you bet on the Dollar or rather against it? And why? Tell us in the comments below

About the Author: Prasuk Jain | 45 Post(s)

Prasuk is an inquisitive and tenacious person with a mix of enthusiasm and a positive attitude, currently pursuing CA. 

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