Definition
Currency Hedging (International Funds)
Currency hedging is the use of forwards or other instruments to offset the impact of exchange-rate movements on an internationally invested fund's returns, isolating the underlying market's performance.
An Indian investor in an unhedged international ETF or fund bears both the foreign market's return and the rupee-dollar move; if the rupee depreciates, returns in rupee terms rise, and vice versa. A currency-hedged product removes most of this exchange-rate effect at the cost of hedging fees.
Most Indian international funds are unhedged, so currency is a meaningful, sometimes dominant, driver of returns. Investors should understand whether a fund is hedged before assuming its performance reflects only the foreign index, since the rupee's trend can add to or erode the underlying gains.
Related terms
- Tracking ErrorTracking error is the standard deviation of the difference between an index fund or ETF's returns and its benchmark index's returns, measuring how consistently the fund follows the index.
- Premium/Discount to NAVAn ETF trades at a premium when its market price is above its net asset value and at a discount when below, reflecting temporary imbalances between on-screen supply and demand and fair value.
- Fund of Funds ETFA fund of funds (FoF) is a mutual fund scheme that invests in units of other funds or ETFs rather than directly in securities, often used in India to give domestic investors access to ETFs without a demat account.
- International ETFAn international ETF gives Indian investors exposure to overseas markets or indices, such as the Nasdaq 100 or S&P 500, by holding foreign securities or feeding into an overseas fund.
Plain-English explainer from The Dispatch Investors Encyclopedia. General information, not financial advice.