Published Jun 18, 2026 4 Min Read

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Introduction

Currency risk refers to the impact that changes in currency exchange rates can have on your investment returns. If you invest in international funds, movements between the Indian rupee and foreign currencies can increase or reduce your returns even when the underlying investment performs well.

  • Currency risk becomes relevant when you invest in overseas stocks, bonds, or international mutual funds.
  • Rupee depreciation can increase the value of foreign investments when converted back to Indian rupees.
  • Rupee appreciation can reduce returns from international investments.
  • Exchange rates are influenced by inflation, interest rates, trade balances, and global events.
  • SEBI-regulated mutual funds disclose risk levels through the riskometer ranging from Low to Very High.
  • You can invest in international mutual funds through SIP or lumpsum modes on the Bajaj Broking website.

You can explore 4,000+ mutual fund schemes on the Bajaj Broking website, complete your KYC as required by SEBI, and start investing with SIPs from Rs. 100 per month.

What is currency risk?

Currency risk is the possibility that changes in exchange rates may affect the value of your investments. It is also called exchange rate risk or foreign exchange risk.

If you invest in international mutual funds, your returns depend on two factors. The first is the performance of the underlying assets. The second is the movement of the foreign currency against the Indian rupee.

For example, if a US stock fund rises by 10% but the US dollar weakens against the rupee, your actual return in rupees may be lower.

What types of currency risk can affect you?

Currency risk can arise in different ways depending on your investment exposure.

Type of currency riskWhat it meansImpact on investors
Transaction riskExchange rates change before a transaction is settledCan alter investment value
Translation riskForeign assets are converted into rupees for reportingChanges portfolio valuation
Economic riskLong-term currency movements affect economic conditionsCan influence fund performance
Conversion riskReturns are converted from a foreign currency to rupeesMay increase or reduce gains

If you invest in international funds, conversion risk is usually the most visible form of currency risk.

Why do exchange rates change?

Currency values move because of several economic and market factors.

Common causes of currency risk include:

  • Inflation differences between countries
  • Interest rate changes by central banks
  • Trade deficits and trade surpluses
  • Foreign investment flows
  • Political uncertainty
  • Global economic events
  • Geopolitical tensions

When these factors affect the Indian rupee, they can influence returns from overseas investments.

How does currency risk affect mutual fund investors in India?

If you invest only in domestic mutual funds, currency risk is generally limited. However, it becomes important when you invest in international funds or funds holding foreign assets.

When the rupee depreciates

Rupee depreciation means the rupee becomes weaker against another currency such as the US dollar.

If the rupee weakens, the value of your foreign investments may increase when converted back into rupees. This can boost returns.

When the rupee appreciates

If the rupee strengthens against foreign currencies, your international investment returns may reduce after conversion.

Even if the overseas fund performs well, a stronger rupee can lower the gains you receive in Indian currency.

SEBI requires mutual fund schemes to disclose their risk levels through the colour-coded riskometer: Low, Low to Moderate, Moderate, Moderately High, High, and Very High.

Currency risk examples — Real-world impact

The impact of currency risk can be easier to understand through examples.

ScenarioInvestment performanceCurrency movementPossible result
US fund gains 12%PositiveRupee depreciates 8%Higher overall return in rupees
US fund gains 12%PositiveRupee appreciates 6%Lower return in rupees
US fund falls 5%NegativeRupee depreciates 10%Currency gain may offset some losses
US fund falls 5%NegativeRupee appreciates 5%Losses may increase

Actual returns depend on multiple factors and cannot be guaranteed.

What are the implications of currency risk?

Currency risk can create both opportunities and challenges.

Potential benefits

  • May improve returns when the rupee weakens
  • Adds diversification beyond domestic markets
  • Provides exposure to global businesses and sectors

Potential drawbacks

  • Can reduce returns despite strong fund performance
  • Creates additional volatility
  • Makes investment outcomes less predictable

You should evaluate currency exposure alongside fund objectives, asset allocation, and risk tolerance.

Conclusion

Currency risk is the effect that exchange rate changes can have on investment returns. It is especially important when you invest in international mutual funds.

A weaker rupee can improve returns from overseas investments, while a stronger rupee can reduce them. Understanding currency risk helps you make better investment decisions and set realistic expectations.

If you want international exposure, you can explore international mutual fund options on the Bajaj Broking website alongside equity, debt, hybrid, ELSS, thematic, and NFO categories. The platform offers 4,000+ mutual fund schemes and allows investments through SIP and lumpsum modes, with SIPs starting from Rs. 100 per month.

Frequently asked questions

How does currency risk affect mutual fund returns in India?

Currency risk affects the value of returns from international investments when foreign currencies are converted into Indian rupees. If the rupee depreciates, your returns may increase. If the rupee appreciates, your returns may decrease. This means the performance of an international mutual fund depends on both the underlying assets and currency movements. The Bajaj Broking website offers access to international mutual funds where currency exposure may influence returns.

What causes currency risk or rupee depreciation?

Currency risk is mainly caused by changes in exchange rates. Rupee depreciation can result from higher inflation, lower foreign investment inflows, widening trade deficits, rising import costs, geopolitical events, or changes in interest rates. Global economic conditions can also affect currency values and create fluctuations in investment returns.

How can investors manage currency risk in international funds?

You can manage currency risk by diversifying investments across different regions and asset classes. Investing gradually through SIPs may also help reduce the impact of market timing. Before investing through the Bajaj Broking website, review the fund objective, geographic exposure, and the SEBI-mandated riskometer to understand the associated risks.

Is currency risk good or bad for Indian investors?

Currency risk is neither entirely good nor bad. It can increase returns when the rupee weakens against foreign currencies. However, it can also reduce returns when the rupee strengthens. Whether currency risk helps or hurts your portfolio depends on exchange rate movements and your investment horizon.

What is currency risk in mutual funds for Indian investors in 2026?

For Indian investors in 2026, currency risk remains the possibility that exchange rate fluctuations may affect returns from international mutual funds. As global investing becomes more accessible, understanding how the rupee moves against currencies such as the US dollar is important. The Bajaj Broking website provides access to 4,000+ mutual fund schemes, including international investment options where currency risk may play a role.

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