Non resident Indians are a unique group of Indian citizens who have taken the unconventional path of working or settling down abroad. However, this is a boring description. A more interesting picture of an NRI is the Bollywood Hero, who is in a successful management position in New York or San Francisco and their family folks back home already have a farm land, ancestral property and family business/occupation in India.
In reality this is not true for all NRIs, because we see several people from humble middle class backgrounds moving abroad for studies or work. Hence financial planning and investing are more critical or important for NRIs, who are not as rich as their Bollywood Heros. Read some interesting investment options for NRIs in India
All NRIs are not same
All NRIs are not the same and their needs are completely different. For instance we can divide them in to several profiles:-
- Young Working Professionals (2-5 years of work experience)
- Established Working Professionals (More than 5 years)
- Established with Citizenship abroad
There are two common ways for Indians to migrate or move abroad
- As students
- As working professionals
There are other ways, which are not tapped by most middle class people (Aam Admi), so lets ignore that bit. Working professionals generally have a good head start in terms of savings because they have a stable source of income in place from day one. But students have to wait out a few years to complete their studies, bear high costs and later start repaying their education loans. For the scope of this article I’m assuming you are a NRI working abroad with some surplus savings to invest. Now lets look at the various investment options available to you.
Where can NRIs invest?
So what are the investment options for NRIs in India? NRIs can invest in the following instruments or asset classes
- Bank deposits
- Equity Shares
- Mutual Funds
- Gold ETF
- Property (excludes agricultural land, plantation or farm house)
To get started in investing one needs a back account to make remittances and for purchasing investments. Secondly NRIs have to keep a reserve for contingencies.
Start a Bank Account
To start with an NRI needs to have a bank account in India. This account could either be a Non-Resident (Ordinary) Rupee Account (NRO Account), a Non-Resident (External) Rupee Account (NRE Account) or Foreign Currency Non Resident (Bank) Account – FCNR (B) Account. For more on this you can visit the RBI site.
This is just like a normal checking account or a regular bank account where you keep money. You can also meet and discuss with your banker to know the complete formalities and documentation required for the same.
Maintain Contingency Funds
First and foremost NRIs should make sure that they have enough emergency or contingency funds to meet sudden expenses arising out of unforeseen events or situations.
This is important for everyone (not just for NRIs) and it includes situations like loss of job, sudden medical emergency, an accident, natural calamities, etc. This can range from 3-6 months of expenses.
I would ideally recommend up to 6 months because you also may have to budget for traveling back home for some contingencies.
This could be maintained in your regular checking/banking account or put in a deposit account (the terminology could vary depending on the country or geography). The idea here is to have a reserve in place for any unforeseen emergency need. Secondly, this helps you to have access to cash/funds without diluting your investments (in India or elsewhere).
Choosing Investment Options
Once you have the above two in place you are ready to invest any additional savings in different investment vehicles. I’m going to discuss about various investment options in India here.
Its true that deposit interest rates in India are highly attractive compared to those abroad. However, if you look at the post tax returns it may not make sense. Despite this some NRIs prefer this for safety of capital rather than returns. For example if interest rate on a 1-year deposit is 6% p.a. and assuming the applicable tax rate is 30% then the post tax return is just 4.2%, which is peanuts for a one-year deposit. But this may be far better than 3% or less offered in US and other developed nations. (Disclaimer: These are just examples. So check for recent data and take professional advice before taking decision).
Bonds or Debentures
Bonds also have features similar to deposits, however corporate bonds offer a higher interest rate or coupon than bank deposits. But remember that you slightly compromising on safety that bank deposits offer. The risk is a potential default by a company in payment of interest or principal or both. To minimize or avoid this risk you have to choose bonds of reputed and financially sound companies. Try to stick to bonds that have a credit rating by CRISIL, ICRA, etc. Lastly, I would frankly say that choosing a company/bond with slightly lower coupon but with strong rating, reputation and sound financial status is advisable.
Stocks or Shares (Equities)
There are two options to get in to equities – direct investment in stocks or investing via mutual funds. You can do both as well if that suits your investment or financial objectives. For people who want to invest in stocks directly a trading account, a demat account and a net banking account would be necessary. The trading and demat preferably can be opened with a leading broker or financial intermediary such as Indiainfoline, Kotak, Sharekhan, etc. (I’m not recommending anyone in particular).
Stocks provide returns in the form of dividends (instead of coupon as in bonds) and capital appreciation (increase in stock prices).
Investing in stocks can be highly risky but at the same time provide handsome rewards. But one must be prepared to face losses as well. This requires you to study the markets, companies and sectors or take professional help. The other alternative is to invest via mutual funds.
Read this blog to understand more – How to invest in stock markets in India
These are investment vehicle that collect funds from numerous investors and invest the proceeds in different securities – equities, debt, commodities, etc.
For instance Mr.Narayanan was keen on making investment in equities but he could not understand or pick stocks. Hence he decided to invest in DSP BlackRock Equity Fund, which invests in a diverse set of stocks in India. Since the fund holds more than 30 stocks in its portfolio, he is insulated from any dramatic change in the price of one stock/company. This diversification provides protection from extreme swings in a particular industry/company.
For people like Narayanan who prefer to invest via funds, I would recommend choosing 3-4 good funds across different categories – one large cap fund, one diversified fund, one debt fund and one gold ETF.
Mutual Funds also provide returns in the form of dividends (instead of coupon as in bonds) and capital appreciation (increase in stock prices).
Read this blog for better understanding – Which is the best mutual fund in India
Gold ETF (Gold Exchange Traded Fund)
Why gold? It provides you a hedge against inflation, and also serves as a safe haven when economic growth slows down or comes to a halt. (Although the ‘safe haven’ concept is debatable, Gold is definitely a good store of wealth). Human beings have been using Gold as a currency or as a store of value for centuries, several centuries before stocks and bonds came in to existence. Financial advisors recommend having up to 10% of your investments in Gold, but this is only a guideline – you could even have more say 20% of your portfolio in Gold provided you are comfortable with the nature of investment and volatility.
Since gold is a vast topic I would request you to read the following exclusive articles on Gold/Gold ETF.
Gold ETF provides returns in the form of capital/asset price appreciation only. You will not get any income stream such as dividend or interest.
Real Estate (Residential House/Apartment)
The most simple options for investing in real estate would be residential houses or apartments. These could be brand new or resale properties. Choosing a ready-to-occupy property is a smart decision because you can immediately occupy and save on rents where it is purchased for personal use. In case you where you are not using the property you can consider renting it out from day 1 or month1, creating a secondary income stream.
Given spiraling prices you may think how to budget for buying a property. Remember that you don’t have to bring in all the funds. If you can put a down payment of 25-30% (depends on agreement with bank), then the remaining can be financed through a loan from bank or housing finance company. Remember that property investments have the potential to make you a millionaire atleast in rupee terms.
Real Estate will provide returns in the form of capital/asset price appreciation as well as regular rental income.
Investment Options for NRIs in India – Conclusion
Investing in India provides you the potential to get superior returns and in addition access to facilities or assets in India. For some NRIs, assets in India serve as a backup if they decide to relocate after a few years. Some NRIs have property or other investments in India for their retirement.
The options above are not mutually exclusive – so you can choose 3-4 or more investment options so that you have a balance across different asset classes. In case you haven’t started investing you can begin to invest now. For those who are concerned about formalities, legal procedures, etc.,
I would suggest consulting a Financial Advisor or a Chartered Accountant. You should also have one family member in India to handle the paper work in your absence. Although the initial procedures can be difficult, once you have some investments in place, you need to review it probably twice or thrice a year. Hopefully these tips on investment options for NRIs in India will make you richer. In lighter vein, if you invest wisely, you could turn out to be a better role model than the Bollywood hero we discussed.