Unlocking Financial Stability: The Benefits of Currency Diversification for Indian Investors

Indian investors are particularly known for their cautious approach to investment in general. Coupled with their attentive nature, their preference for conventional investment avenues like real estate and gold is also widely known. This has been driven by the years of imparity of wealth in India across various socio-economic classes, a fact that has kept them away from seeking investment avenues abroad. Also, a lack of awareness in personal finance management has resulted in millions not grasping the importance of inflation hedging techniques, particularly currency diversification or forex trading.

Sumi Rengaraj, Founder and CEO of Ashton Gray Investments said, “We have always maintained our cultural heritage that is rooted in India, and given the chance, we always wanted to deepen our commitment and dedication to the economic growth of the country. Our foremost priorities lie with our investors, a major portion of whom are Indian citizens”

For example, a recent survey by a prominent media outlet revealed that 48% of Indians prefer real estate over other asset classes in the country. Indians are still highly attracted to domestic investment avenues, as diversification is yet to take the front seat in their portfolio. However, diversifying currency offers many benefits to investors, particularly in hedging inflation and capital appreciation. While it is not without risk, investors can take several approaches to address these challenges. Based on their risk tolerance, priorities, future plans, and currency exposure, investors can adapt a unique currency diversification strategy that aligns with their requirements. Presently, the foreign exchange market has established itself as the world’s largest financial market and offers improved accessibility, liquidity, and global exposure. Without further ado, let’s take a look at the benefits of currency diversification, focused on the needs of Indian investors.

Global Exposure

The forex market, where traders and investors operate to buy and sell currencies, is spread across the world. Its expansive nature is evident from the fact that the market records an average transaction worth $4 trillion every day. This offers Indian investors a global avenue to appreciate their capital and truly diversify their portfolios. The humongous size of the currency market also allows Indian investors to receive much-needed exposure, preparing them with unique investment ideas and strategies.

Hedging against inflation

Diversification through foreign currency is a viable strategy to hedge against inflation. As per government data, India’s retail inflation was recorded at 4.83 percent in April 2024. Additionally, the value of the INR has fallen significantly over the last year, from INR 82.82 against 1 USD on May 23, 2023, to INR 83.21 against 1 USD on May 22, 2024. The valuation of the US dollar fluctuates because of interest rates and economic growth and offers a significant capital appreciation avenue to Indian investors seeking inflation-hedging strategies.

Investors need to keep in mind that, similar to every asset class, currencies can also be traded. For example, when the British Pound’s value shows a bullish trend, investors can buy it to receive capital appreciation. It can also be used to complete transactions, from groceries to everyday needs, resulting in significant liquidity.

Cost-effective

Unlike other asset classes, when Indian investors decide to diversify their portfolio through currencies, no fees are required. The term ‘no fees’ directly translates to zero brokerage fees, zero governmental fees, and zero exchange or clearing fees. The retail forex brokers receive compensation through a process called spread. However, tax is deducted from the income, which is nominal compared to other asset classes. Furthermore, transaction costs vary between 0.1% and 0.07% under nominal market dynamics. This presents a much more economical solution for investment to Indian citizens.

Liquidity

Unlike different asset classes, forex assets are highly liquid. This means that the currencies can be withdrawn seamlessly, which is often not the scenario with asset classes like real estate, gold, or equity. Under normal market conditions, investors need only a mouse click to complete transactions, so their capital remains highly movable and is not stuck between trades.

Absence of central exchange and market movers

The currency market is so vast that no single central exchange or bank regulates it. Due to its size, no single entity is also able to change the direction of the market, diminishing the risks of a crash significantly. When compared with conventional asset classes, they are often regulated by a central exchange (for example, SEBI regulates the National Stock Exchange) and have bulls or bears to take the market either up or down. This aspect safeguards investor capital and provides reliability. This also keeps the costs significantly low in contrast to other asset classes.

However, it needs to be remembered that central banks in different countries may occasionally step into the currency market, but these incidents remain rare and primarily happen in the aftermath of extreme conditions.

Conclusion

Currency diversification is gaining increased popularity among Indian investors, particularly as a result of India’s economic rise. Indian citizens are currently accumulating more wealth than they did before, and the currency market has proved to be a viable investment avenue for capital appreciation. The global exposure of the currency market offers investors virtually 24/7 access to the market, offering them opportunities to make large profits in a hassle-free way in comparison with established asset classes. However, similar to all investment avenues, currency diversification comes equipped with both advantages and disadvantages, and investors need to complete their assessment of the risk associated with the market before deciding to enter the fray.