Rupee at 96 — here is which mutual fund categories actually make money when the currency falls to record lows

When the rupee falls to a record low, most investors check their equity portfolio and leave it at that. But currency depreciation is one of the most powerful and least understood forces in personal investing — it silently transfers wealth between different categories of mutual funds in ways that are not obvious until you look at the mechanics.

With the rupee having hit a fresh all-time low of 96.05 against the US dollar on May 15, 2026 — its fourth consecutive session of record lows driven by Brent crude surging to $109 and the Strait of Hormuz remaining closed — understanding which mutual fund categories benefit, which suffer, and which are neutral is more immediately relevant than it has been in years.

How currency depreciation moves mutual fund returns

The rupee's exchange rate affects mutual fund returns through three distinct channels. The first is import cost inflation, which raises input costs for Indian companies that depend on dollar-denominated raw materials — crude, edible oil, electronics components, fertilisers — compressing their margins and weighing on equity valuations. The second is direct NAV translation for international funds, where a weaker rupee mechanically inflates the rupee value of dollar-denominated overseas assets even if those assets have not moved in dollar terms. The third is the gold price channel, where gold is priced in dollars globally and a weaker rupee means domestic gold prices rise in rupee terms even when international gold prices are flat.

These three channels produce very different outcomes across fund categories.

International mutual funds: the clearest beneficiary

International or overseas mutual funds — schemes that invest in global equities, US indices like the S&P 500 or Nasdaq, or global thematic funds — benefit directly and mechanically from rupee depreciation. The mechanism is simple: if a fund holds US stocks worth $10,000 and the rupee moves from 87 to 96 against the dollar, the rupee value of that holding increases from ₹8,70,000 to ₹9,60,000 — a 10.34% gain — even if the underlying US stocks have not moved a single dollar in price.

This is not a prediction about US market performance. It is a currency translation effect that operates independently of equity market direction. In the current crisis, where the rupee has depreciated significantly from its pre-crisis levels near 87 to 96.05 today, investors in international funds have received a meaningful currency tailwind on top of whatever their underlying overseas portfolio has returned in dollar terms.

The caveat: SEBI has imposed overseas investment limits on Indian mutual funds since February 2022, capping total industry overseas investment at $7 billion. Several popular international funds — including some US-focused ETFs and fund of funds — have been intermittently closed to fresh investments when the industry limit is approached. Check whether your chosen international fund is currently accepting fresh investments before investing.

Gold mutual funds and gold ETFs: a double tailwind

Gold mutual funds and gold ETFs are the second clear beneficiary of rupee weakness, and they benefit from both channels described above simultaneously.

International gold prices are denominated in US dollars. When the rupee weakens, domestic gold prices in rupee terms rise even if international gold prices are flat. When both rupee weakness and international gold price appreciation occur together — as has been the case since the West Asia crisis began — the rupee returns on gold funds are amplified significantly.

Gold ETF AUM in India has tripled from approximately ₹59,000 crore to ₹1.71 lakh crore over the past two years — partly reflecting this dynamic. With the government having discontinued Sovereign Gold Bonds in February 2024 with no replacement announced, gold ETFs have absorbed the retail demand that would previously have gone into SGBs, further driving AUM growth.

For investors looking to add gold exposure through mutual funds, gold ETFs — which hold physical gold — and gold fund of funds — which invest in gold ETFs and allow SIP without a demat account — are the two primary vehicles. Both are tax-efficient relative to physical gold and carry no making charges or storage costs.

Domestic equity funds: mixed picture, sector dependent

Domestic equity mutual funds do not benefit from rupee depreciation at the portfolio level in the way that gold or international funds do. In fact, for sectors with high import dependence — oil and gas, chemicals, electronics, aviation — rupee weakness is directly margin-negative, because raw material and fuel costs rise in rupee terms even if revenues remain rupee-denominated.

However, certain domestic equity sectors benefit from rupee weakness. IT services companies — the largest weight in many large-cap and flexi-cap funds — earn the majority of their revenue in US dollars and report costs in rupees. A weaker rupee therefore mechanically improves their rupee-reported margins and earnings, all else equal. Pharmaceutical exporters operate similarly. Domestic equity funds with higher allocations to IT and pharma — such as technology sector funds or pharma funds — tend to outperform during periods of sharp rupee depreciation relative to funds with heavier weights in import-dependent sectors.

Debt mutual funds: the complex case

Domestic debt mutual funds are neither direct beneficiaries nor obvious victims of rupee depreciation, but the second-order effects matter. A weaker rupee raises imported inflation — fuel, edible oil, industrial inputs — which tends to keep the RBI from cutting interest rates even when domestic growth warrants easing. Higher-for-longer interest rates in India suppress bond prices and weigh on the NAV of long-duration debt funds. Short-duration and liquid funds are less affected by this dynamic.

Debt funds that invest in dollar-denominated bonds — some overseas debt fund of funds — would benefit from rupee depreciation on the same translation logic as international equity funds, but these are a very small part of the Indian mutual fund landscape and not widely accessible to retail investors.

The portfolio implication

A period of sharp and sustained rupee depreciation — which is what India is currently experiencing — makes a case for portfolio diversification that most investors in their accumulation phase underweight. Pure domestic equity allocations, while appropriate for long-term wealth building, are not insulated from currency risk. A 5-10% allocation to gold ETFs and, where accessible, a 5-10% allocation to international funds through existing open schemes provides a natural hedge — assets that mechanically appreciate in rupee terms when the currency falls.

This is not market timing. It is structural diversification that reduces concentration in a single currency at a time when that currency is under sustained pressure from an external shock — the West Asia crisis and Hormuz closure — that India has limited ability to resolve on its own.

Disclaimer: This article is for informational purposes only and does not constitute investment advice. Please consult a SEBI-registered financial advisor or a SEBI-registered investment adviser before making investment decisions. Mutual fund investments are subject to market risks. Please read all scheme-related documents carefully before investing.