NRI

The art of managing an investment portfolio is something every Non Resident Indian would be keen to perfect. After all, there is a lot at stake. You have left your roots, your family, friends and colleagues back home—to earn more and grow in your chosen profession, in a different business and cultural environment. Most likely, you have saved up a large amount of money and invested it. But how can you be sure that you have put the money in the right options?


For the lakhs of Indians working abroad and their families back home in India, India is always a destination of choice when it comes to investments. If you are among such NRIs, you would want to put the money to productive use by investing in high return generating instruments. India always offers numerous investment opportunities for foreign investors, who do not enjoy such high rates in their country of work.


If you are looking to invest in India, what are the options you should consider? Before we delve into the choice of investments, let us consider the formalities and procedures that NRIs have to follow to be able to invest in India.

How To Begin

If you wish to invest in India, the first step is to open a savings bank account. There are three basic types of bank accounts for NRIs.


Go for a non-resident external (NRE) rupee account if you are looking to remit overseas earnings to India and hold them in rupees, as also repatriate the proceeds of your investments back to your home country without any restrictions. An NRE account is completely tax-free and no tax is payable on the interest earned on the balance.


But you can’t put income from rent, salary and dividends in the NRE account. For that you need a non–resident ordinary (NRO) account. However interest earned on the NRO account is taxed at a marginal rate of 30% plus surcharge and cess. The balance in the account is also subject to wealth tax.


The advantage is that NRO accounts can be jointly opened with a resident Indian. If you don’t wish to be exposed to exchange rate risk, you can instead open a foreign currency non-resident (FCNR) account with a local bank, where your funds are held in the foreign currency, and not converted to rupees.


Where to invest

For many NRIs, property is the primary choice of investment. The bulk of their money is directed towards real estate investments. However, we feel this is not the ideal route for all NRIs. We always believe in asset allocation and NRIs are not the exceptions.


One should always keep in mind that investment in real estate is an illiquid investment and we don’t see any rationale in an investment decision in which you can’t use your hard earned money when required.


Traditionally, NRIs have been more comfortable investing in real estate in India. Real estate investment gave returns in the country at an average of about 14-17% in this decade. Sensex returned 19% in the decade and top performing diversified equity mutual funds have given returns in the range of 20-25%. Though past performance cannot be a pure indicator of future performance, but the pattern will stay true if the Indian economy grows in the 7-8% range in the next decade. So it makes good sense to get a life beyond real estate !
 
If you are willing to look beyond property, there are a lot of options to park your funds. While considering any of these options, the major deciding factor should be the expected return, and not the exchange rate.


NRIs stand to benefit from investments here when the rupee appreciates against other currencies. Since the exchange rate can go either way, you should focus more on taking a long term view and picking high return instruments.

Some of the options:

  • High Yield deposits
  • Direct equities
  • Mutual funds

 

Some of the options:

1. High Yield deposits:

At times when interest rates are at peak, you can take benefit of higher rates offered for NRE and NRO deposits. These are also reasonably liquid as you can withdraw funds at any time (Subject to interest rate penalty).

One can also invest in FCNR deposits to eliminate the risk of exchange rate volatility. The rate of FCNR deposits differ widely depending on the choice of foreign currency.

2. Direct equities:

NRIs can also invest in equities to participate in the growth of Indian companies. For those NRIs willing to take some risk, Indian equities offer potential for stellar returns. You should keep in mind that stocks require a longer investment horizon. India remains a great investment destination for foreign investors. However, it is advisable to have patience and invest for long haul to truly gain from the growth of some of the fast growing Indian companies.

You can buy equities directly or through an equity mutual fund. To be able to invest directly, NRIs will need to designate their NRE or NRO account as a portfolio investment scheme (PIS) account.

Each transaction in the PIS account is reported to the RBI, as the central bank ensures that the aggregate level of NRI holding in any Indian company does not exceed 10% of its paid-up capital. To be able to transact in Indian equities, NRIs will have to open a demat account and trading account (linked to your PIS account with a local stock broker registered with SEBI.
Keep in mind that NRIs are only allowed to trade shares in India on a delivery basis. This means that you can’t participate in daytrading or short-selling activities. NRIs can also buy through IPOs of Indian companies, for which they don’t have to go through the PIS account. You only need the NRE or NRO account and a demat account to invest in such IPOs. It is the responsibility of the company offering the IPO to inform the RBI how much number of shares they are allotting to NRIs.  

3. Mutual funds:

Mutual funds are probably the best way to invest for every individual. For NRIs, mutual funds are the right way to play Indian equities as these are diversified by nature and offering a degree of safety. Besides, there are several funds which have a proven track record of performance.

There are 27 equity funds, which have completed 15 years, the average SIP return of 27 diversified equity funds is more than 20% over last 15 years. In 1979 sensex was started with a 100 mark, it was 26867 as on 01/09/2014. So you can see that sensex has given a return of more than 17% annualized.

NRI Mutual Fund Investment


Key Highlights

  • Access to a well-diversified portfolio of equities, bonds and other securities.
  • Open-ended funds can be redeemed on demand.
  • Dividends from MFs are tax free in the hands of the investor.

Overview

A Mutual Fund is an investment option that allows investors access to a well diversified–portfolio of equities, bonds and other securities. Through Mutual Funds one can indirectly participate in stock market.

Benefits

Professional management and research: Each Mutual Fund is managed by Professional fund manager who regularly monitors market trends and conducts in-depths research of Mutual Funds.

Risk diversification: Reap the benefits of a large and well-diversified portfolio even with little investment. Reduce your risks and augment your profits.

Convenience: Convenient features like dematerialized account statements, easy subscription and redemption processes, availability of NAVs and performance details through journals, newspapers and updates, investing through MFs is hassle free and easy to track.

Liquidity: Open-ended funds provide the biggest advantage of redemption on demand—an extremely beneficial feature especially during rising or falling markets.

Tax advantages: Dividends from MFs are tax free in the hands of the investor (depending on latest Finance Act). Capital gain accrued from MF investment for a period of over 1 year is treated as long term capital appreciation and is tax free.

Reduction in costs: Your investment costs are lowered given the very fact that MFs have a pool of money to invest and that they are involved in buying and selling of large amounts of securities.

Others: Transparency (funds have to periodically make full disclosure of investments), flexibility in terms of needs-based choices, strict regulation by SEBI with stringent compliance requirements to investor-friendly norms.

Market Watch
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