An unhedged foreign equity fund is compared against a domestic one as though both report the same kind of number. One of them reports the product of two bets, and over long horizons the second bet does most of the work.

An Indian investor buying an unhedged US equity fund holds a position in US equities and a position against the rupee. The factsheet reports one figure. What follows separates them.

Rupee Depreciation Is Structural, Not a Market Call

The rupee has depreciated against the dollar at roughly 3.5-4% a year across most 5, 10, 15 and 20-year windows over recent decades.

That is closer to a structural feature of the exchange rate than a forecast - it largely reflects the inflation differential between the two economies. Because it compounds alongside equity returns rather than being added to them, its contribution grows non-linearly with horizon.

Over Twenty Years, Currency Is More Than Half the Gain

Run illustrative long-run US equity returns of 10% a year against 4% average rupee depreciation, over 20 years:

Growth of ₹1 invested in an unhedged US equity exposure: equity return alone versus the actual INR-terms value, compounding equity return and currency depreciation together.

The equity alone compounds to roughly 6.7x. The actual INR-terms outcome compounds to roughly 14.7x - currency depreciation, not equity performance, accounting for more than half the total gain.

An investor crediting the manager, or the US market, for the whole figure is attributing exchange-rate movement to stock selection. The same error runs in reverse during any period the rupee strengthens, when a competent manager will appear to have underperformed.

The Exposure Is Worth Having Deliberately

None of this is an argument against holding dollar assets. Currency depreciation has been a real and persistent tailwind for Indian investors, and there is a reasonable case for taking the exposure intentionally as a hedge against domestic currency risk.

The objection is to taking it unknowingly, and to letting it be scored as manager skill. A deliberate currency position can be sized, hedged or rebalanced. An accidental one cannot.

What This Means for Allocators

Decompose the return before comparing it to a domestic fund. Only the equity component is comparable to what a domestic equity manager is doing.

Size the currency exposure as its own position. If it is worth holding, it is worth holding on purpose and at a chosen weight.

And judge the manager on the local-currency figure. That is the only number that reflects the decisions the manager actually made.

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