More choice requires more clarity in decision making and non-resident Indians (NRIs), especially those living in the developed world, have a variety of avenues for their investments. They may, for example, choose to invest in the country of their residence or park their savings in the Indian market.
Though the Indian economy has slowed down significantly and is not as attractive an investment destination as it was until a few years ago, it remains one of the fastest growing large economies in the world. The motivation for investing in India could range from just diversification of the portfolio to better understanding of the Indian conditions.
However, questions such as the amount of allocation and the choice of assets must be answered before NRIs begin to build their India portfolio.
The allocation arithmetic:
To solve the puzzle of allocation, NRIs investing in India can be divided into two groups. First, those who have liabilities in India or those who want to come back and settle in India. Second, those who do not intend to come back in the foreseeable future.
Naturally, it would make more sense for NRIs who intend to return or have expenses in India to allocate more money towards an India-focused investment. Says Suresh Sadagopan, founder, Ladder7 Financial Advisories, a financial planning firm: “NRIs should look at Indian assets on merit.”
It should be noted that investing in India also has currency risk and may affect returns for NRIs looking forward to repatriate money back to the country of their residence. For example, if an NRI invests in an instrument in India and earns 10% in a year, but if the currency falls by more than 10%, as it has happened in the last few months, he will suffer a loss. However, if the idea is to invest for future needs in India, the rupee depreciation will not matter much as expense will also be in rupees.
Choice of assets:
NRIs have the choice of investing in equity, debt and real estate in India. NRIs can invest both directly and through mutual funds in the Indian equity and the debt markets.
Says B. Gopkumar, executive vice-president and head-broking, Kotak Securities Ltd: “The term deposits are very attractive for NRIs right now.” Term deposits are offered by commercial banks in India. Gopkumar argues that there is huge interest rate arbitrage for NRIs in term deposits. While an NRI will earn about 2.5-3% in the developed world, the interest rate is 8.5-9% on non-resident external (NRE) accounts, where money is freely repatriable and the interest is also tax-free in India. So even if gains are affected due to a fall in rupee, NRIs could still earn more on their investment compared with fixed-income products in the developed world.
NRIs comfortable with equity may also like to accumulate shares of some of the frontline companies in India.
In real estate, too, the case is more compelling for NRIs who wish to come back and settle in India. This asset class may not make much sense if the property is bought only for investment purpose. Since the owner will not be living in India, there is a chance that she will lose out on the rental income and it is only capital appreciation that will count, which according to experts, is similar to returns in other assets in the long run. Says Vishal Kapoor, general manager (wealth management), India and South Asia, Standard Chartered Bank: “One should not be over-exposed to real estate.” People generally see real estate as a high return asset, but Kapoor argues that it is not the only asset that gives good returns.
For NRIs, investment in India should be part of the overall financial plan. However, it makes sense if NRIs with current or future financial commitments in India keep some part of their portfolio in India. For NRIs who do not plan to come back anytime soon, India is like any other market and the allocation should depend on the merit of Indian assets.