For many NRIs, investing in India is more reliable because of tax benefits & better growth opportunities.
In our previous article, we looked at some of the issues faced by the professional NRIs when planning their finances. This time let us look at the opportunities available to the NRIs when they move from saving to investing their money.
Investment choices available locally
We begin going up the risk-reward line and identify invest opportunities for the NRIs in their home country. We focus primarily on US.
Checking/saving accounts: Due to inertia (checking account is opened as a salary account) or lack of financial advice, money typically lies in checking accounts here earning as low 0.25%. Savings accounts cost a fee or come with a minimum deposit requirement and can earn slightly greater 5% in the USA currently. These accounts are good for short-term liquidity and emergency needs.
401(k) contributions: Similar to our EPF contributions, 401(k) contributions are typically limited to 6% of employees’ pay. Employers typically “match” the employee contribution and the employee contribution is tax deductible.
With pensions changing from defined benefit to defined contributions, the risk of investment lies with the employee. Investment options here include diversified international mutual funds, but few India-specific funds may be provided by the employer’s 401(k) manager.
Investment in shares/mutual funds/ETFs: Investment can be made into shares of all the locally-listed companies. More importantly, they can invest in mutual funds. In the US, mutual funds invest across various asset classes and currencies. Hence, it is possible to diversify portfolio according to needs. With ETFs available on various indices and commodities, diversification is easy.
Real estate: It is possible to buy real estate in the USA, especially if it fits into your long-term goals. Typically, this is advisable for professionals who know for sure that they will stay in a particular location/city for the foreseeable future. With an evolved credit scoring market, it is possible to get a loan based on your credit records.
Investment choices in India
In India, almost all avenues that are available to resident Indians are available to NRIs: All one requires is a Permanent Account Number (PAN).
NRE/NRO accounts: NRIs can park their liquid money/fixed deposits in the Non Resident External or Non Resident Ordinary account. NRE accounts allow for repatribility while investments in the NRO accounts mean that the money cannot be taken out of the country.
Shares/mutual funds: NRIs can purchase shares and mutual funds under general exemption granted by the RBI. However, in the USA, the SEC prohibits anyone from investing in securities that have not been registered with it. Hence, many mutual funds (especially those with US origins/offices) do not allow investments from the USA NRE accounts. However, fund houses that do not have an office in the USA do allow investment in their MFs.
Insurance: NRIs, if they have insurable interest, can purchase insurance from Indian insurance companies. Hence, they can buy health and/or life insurance on self as well as on relatives/dependents.
With the innovation of Ulips, they can also ride the equity or debt markets in India based on the insurance premium that they pay. Typically, for life insurance, if they are interested in taking term insurance, they should compare the rates across both the geographies.
Real estate: Real estate is the preferred investment vehicle for many NRIs. It requires making the investment decision one time: you don’t need to keep revisiting the decision for the medium to long term. However, liquidity, timely completion and right titles are a concern. With the advent of real estate mutual funds, it should provide an easier and safer access to this asset class.
Reasons for investing in India
Emotional reasons: Primarily for many NRIs, investing in India has an emotional angle. Sometimes, it is due to familiarity with the investment instruments here or due to the need of some dependant here.
Tax benefits: Indian tax laws provide for a very lenient calculation of the tax liability of long-term gains. While long-term capital gains are exempt from tax in the case of equities, in the case of real estate, it is only 10% of the gains. Similarly, any money received from the insuranc ..
Diversification across currencies: With many NRIs, investing in Indian rupees gives them an exposure to a different currency: a currency in which many of their long term dreams (like retirement) or short term commitments (supporting dependents) may be denominated. If an NRI plans to return within the next five years, he should plan to increasingly shift his exposure to Indian rupee. Leaving it to the last minute can mean a significant exchange rate risk.
Better growth opportunities: With India emerging as an asset class on its own right and providing (and expect to continue providing) higher returns that the developed markets, many NRIs think that India would be a better investment opportunity than their new homeland!
The author is a Director of PARK Financial Advisors