Hedged vs unhedged

5 min · For educational purposes only

Hedging removes FX volatility at the cost of interest-rate differential. Whether it is worth doing depends on horizon and liability matching.

What hedging costs

An INR-hedged US equity position costs roughly the difference between US and Indian short-term rates — currently around 2–3% annually. That is the carry you give up to remove FX volatility.

For a 1-year holding period, hedging makes sense when the cost of carry is small relative to expected FX volatility. For a 20-year holding period, the compounded cost of hedging consumes most of the historical INR depreciation tailwind, often making unhedged the rational choice.

When hedging earns its cost

Liabilities in INR (school fees, EMI, retirement income in India)
Short horizons where FX could swamp asset return
Defensive sleeves where capital preservation in INR matters
Tactical positions where FX is not the intended bet

Key takeaways

Hedging costs the interest-rate differential — currently 2–3% per year.
Worthwhile for short horizons and INR-denominated liabilities.
Long-horizon growth allocations are usually better left unhedged.