The Hindu Business Line : Does investing abroad generate higher returns?

Consider this. A top-rated 10-year corporate bond in the US may provide a yield of 7.5 per cent. A comparable bond in India may fetch a yield of, say, 10 per cent.

Despite lower yields on bonds, investing abroad may generate higher returns, as the fund can hope to make money in the foreign exchange market. How?

For many years now, the rupee has mostly depreciated against the US dollar. This fall in rupee value against the dollar increases the funds' returns.

Suppose one dollar is worth Rs 48 now. This means that the mutual fund will require Rs 48 lakh if it proposes to invest $1 lakh.

Assume that the fund invests in bonds that carry a yield of 7 per cent. A year later, the fund will have $1.07 lakh, as the 1 lakh invested in the bonds will have earned 7 per cent interest for one year.

Suppose the rupee depreciates against the dollar during this period such that the exchange rate is one dollar equals Rs 50.

The $1.07 lakh will fetch the mutual fund Rs 53.5 lakh (Rs 1.07 lakh multiplied by Rs 50). That works out to a return of 11.45 per cent on the initial investment of Rs 48 lakh!

Notice here that the gain from the rupee depreciation, coupled with the interest earned on the bonds provides the mutual fund higher returns than investing in bonds in India.

This strategy will work primarily if the rupee depreciates against the dollar. That is something the funds will take into consideration before investing in bonds abroad.

Send this article to Friends by E-Mail

Stories in this Section
Tea — pale and watery

Tea: Positive policy changes

So, what's for tea?

Coffee: Brewing still

`We want to deliver a better mix' -- — Mr P. T. Siganporia, Deputy Managing Director, Tata Tea

Uneven tax field for domestic manufacture

Mastershare 86: Hold/Avoid fresh exposures

Sundaram Bond Saver: Invest

UTI Services Fund: Cut exposures and book profits

Pioneer ITI FMCG: Pare exposures

MIP '97: Take cash, avoid rollover