Thursday, August 29, 2013

Why Capital Protection is as Important as Capital Appreciation

There is a wise saying that "one penny saved is one penny earned". This is true even in the world of investment and saving. In today's volatile world your gain on equities or other investment options e.g. bond or fixed deposit can quickly erode due to depreciation in currency. This is what happening currently in India, with rupee depreciating to record low and inching towards physiological 1 USD = 70 INR, talk of capital protection is gaining momentum over capital appreciation. Since everybody focuses on capital appreciation and that is also the main objective of saving and investment, but if you don't pay enough attention to what happening around the world, you may quickly lose all your appreciation. If you are an NRI, who has positions on Rupee e.g. may be with an investment in equities or real estate, you can understand that with falling rupee, all those capital appreciation quickly erode.


Sometimes it's better just to hold dollar rather than converting them to the rupee. Capital protection is a way to prevent loss of value by taking it to safe heaven, this is currently happening in India and part of it is responsible for historical fall in rupee value. FII or foreign investors are taking money back to the USA because they are more confident of a stable growth there.

This is further adding to the strength of the dollar and currently, USD is like gold. By converting positions into safe heaven currencies e.g. USD or JPY, you are actually protecting your money or capital, had that capital remain in weak currency like Rupee at the moment, it will quickly lose its value.



By the way, not everyone has the option of protecting capital by converting it to different foreign currency, but there is one way of capital protection from common man is to buy gold. Since gold is also known as a safe haven and store of value, in a time of currency volatility, it's best to keep investment on Gold. By the way, this is a vicious cycle in India. Since India imports Gold by giving dollars, the demand for Gold further adds on the weakness of rupee.

This is a big question, either you leave yourself to suffer due to the negligence of policy makers or make your decision and convert some part of your investment in Gold until currency stabilize itself. For Nonresident Indians leaving abroad e.g. on United States, Canada, England, Singapore, it's best to keep their investment in stronger currencies e.g. USD, GBY or SGD.


Another option is investing on FCNR fixed deposits to take advantage of increased rates offered by Indian banks and also gaining due to appreciation on exchange rates. Though appreciation on exchange rate is not guaranteed and when your FCNR fixed deposit get matured, there is no guarantee that whether exchange rate will be favorable or not.


Taking this call is not very difficult at least in short term, where current economic situation in India not looking great to improve quickly.

Captial protection and Capital appreciation

Let me know what is your thought on Capital protection and Capital appreciation and What are you doing to protect your capital in volatile environment.


3 comments:

  1. Good thought, but how do you protect your capital, especially those who are exposed to market risk, e.g. your investment on equities. Though sometime returns from Equities and Market is good, many times retail investor only lose money there. Please suggest some tips to protect capital there and also earn some handsome appreciation.

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  2. For US NRI with money in NRE rupee account in India, which lost a lot of value due to exchange rate slide, what do you advise? The rupee account interest rate is washed out by exchange rate loss. The FCNR seems to be a safe bet. For repatriable account, what is the best way top preserve purchasing power in USD, and for non repatriable NRO account, what is the best way to protect against inflationary loss? Even if we eary 9% that is still less than real inflation. Going into gold/real estate may be only way to protect against inflation, but real estate can be not liquid and it is difficult to estimate correct price.

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  3. Capital appreciation is often a stated investment goal of many mutual funds. These funds look to find investments that will rise in value based on increased earnings or other fundamental metrics. Investments targeted for capital appreciation tend have more risk than assets chosen for capital preservation and income generation, such as government, municipal bonds, or dividend-paying stocks. Because of this, capital appreciation funds are considered appropriate for risk-tolerant investors.

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