Jhonny, an investor, had been hearing a lot about India's booming economy. With excitement, he decided to invest $10,000 in Indian stocks. At the time of investment, the USD rate was ₹80. He converted his $10,000 into ₹800,000 and invested it in the Indian market.
Initial Investment: $10,000 USD = ₹800,000 INR
Jhonny was confident. India was the future, after all! One year later, his investment grew by 15%, bringing his portfolio to ₹920,000. He was thrilled - he just made ₹120,000 in profit!
Profit Before Tax: ₹120,000
- Tax on profit (10%) = ₹12,000
- Amount left after tax = ₹908,000
But here's where things took a turn. The exchange rate had changed from ₹80/USD to ₹90/USD. When Jhonny converted his ₹908,000 back to dollars, he got just $10,088.
Final Conversion: ₹908,000 ÷ ₹90/USD = $10,088.89
Despite a 15% market return, after taxes and currency depreciation, Jhonny's real return was just 0.88%!
If he had just parked his money in a 5% risk-free bond, he would have been better off. Jhonny made a tough decision - he exited India.
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