Indian Investors: how inflation is hurting your returns

When investing in equities, Indian investors must be aware that the realized return is driven by both performance of the stock and by the change in value of Indian Rupees. If an investor invests in Indian stocks that give 10% return, while at the same time the INR experiences inflation of 10%, then in absolute term, the investor breaks even, before taking into account any associated trading costs. On the other hand, if the investor invests in US stocks that give 10% return, while the Indian rupee experience 10% inflation against the US dollar, then the investor enjoys a 21% return. Figure 1 below illustrates the difference in inflation rate between India and US. In contrast to US’, India’s inflation rate has been much more volatile, ranging from less than 12% to about 2% in recent months.

Figure 1: Inflation rate comparison between India and the US

To take into account effects of inflation, an apt comparison between the performance of the Indian stock market vs. the US market is to compare the S&P 500 with the Dollex-30. The S&P 500 is the index that captures the top 500 companies in the US, while the Dollex-30 is the USD version of the SENSEX, India’s top 30 stocks-index. The Dollex-30 allows investors to measure return after controlling for currency fluctuations. Figure 2 compares the performance of the two indexes from the past ten years. The data was taken from S&P Dow Jones indices. It shows that, after taking into account the effect of inflation, the S&P 500 outperforms the Dollex-30. The S&P 500 gives an average compounding annual return of 10.58%, while the Dollex-30 yields 6.17%. This means if an investor invests USD$ 100 in the S&P 500 ten years ago, this investment would have become USD$ 272. In contrast, the same investment made in the indian stock market, controlling for the effect of inflation would have given USD$ 182. Note that this result does not take into account dividends paid by the S&P 500 companies.

Figure 2: Performance comparison between S&P 500 and Dollex-30 (source: S&P Dow Jones Indices)

Thanks for reading! Our team at Vested is hard at work on building a platform that enables retail investors from India to invest in US equities.

This article is meant to be informative and not to be taken as an investment advice, and may contain certain “forward-looking statements,” which may be identified by the use of such words as “believe,” “expect,” “anticipate,” “should,” “planned,” “estimated,” “potential” and other similar terms. Examples of forward-looking statements include, without limitation, estimates with respect to financial condition, market developments, and the success or lack of success of particular investments (and may include such words as “crash” or “collapse”). All are subject to various factors, including, without limitation, general and local economic conditions, changing levels of competition within certain industries and markets, changes in interest rates, changes in legislation or regulation, and other economic, competitive, governmental, regulatory and technological factors that could cause actual results to differ materially from projected results.

Our team members at Vested may own investments in some of the aforementioned companies. Different types of investments involve varying degrees of risk, and there can be no assurance that any specific investment or strategy will be suitable or profitable for an investor’s portfolio. Note that past performance is not indicative of future returns. Investing in the stock market carries risk; the value of your investment can go up, or down, returning less than your original investment. Tax laws are subject to change and may vary depending on your circumstances.

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