NRIs – Not all of you should be investing here!

If you are reading this with the intention of knowing where NRIs should invest, you will be disappointed. But I can tell you this: no seller of investment products in India is going to discuss this. I am going to discuss whether NRIs should be investing at all in India under certain circumstances, and where they should not be investing.

NRIs who approach us for investment options broadly fall under the following categories: one, those who are abroad on an assignment and will come back. Two, those who are settled abroad and do not plan to come back. Three, those who are abroad, have no immediate plans to come back but ‘may’ decide to come back at some point. The third category is the problem category and account for the majority, unfortunately.

Planning to return

Now, the first case is simple. this category of NRIs either have their families in India or plan to return to India with their families, have income and expenses in rupee and remit money into India regularly.

For these NRIs, investing in their home country for their goals and objectives here is logical. However, I have trouble with their following habits: First, while they obsess over currency-conversion they fail to do the ‘mental accounting’ of segregating for aspirations like education, wedding or retirement. For example, many of the NRIs let their child continue education abroad. In this case, they would have been better off holding and investing in dollar-denominated (or foreign currency) assets to help them with such education expense. A proper goal-planning exercise will help decide where to invest in.

Second, their obsession for real estate makes one wonder whether distance from one’s own land compels them to own a piece of their motherland in bond paper. This craze has partly come down in the last few years as real estate sector was down, and rental yields went even below 2.5% and NRIs struggled to even find tenants for their properties.

Third, some NRIs who have held only NRE deposits all their life, retire, come back and then entirely shift to high risk products like PMS, AIFs equity funds or stocks. They do this since NRE deposits lose their tax-free status once they become residents.  Here, I must make a special mention about NRIs from the Gulf as opposed to those from US or other western countries. Having paid little to no tax in India (NRE deposit) or the Gulf almost all their lives, their only overriding criteria is about investing where the tax is less. But upping risks suddenly, especially, post retirement, can leave them in trouble unless they are clear they have other sources of income.

Settled abroad

These NRIs are permanently employed abroad (say US/Canada/UK/Australia) and settled there with their families and do not plan to come back to India. In this case, typically, they may have their aged parents or siblings in India. Other than that, there is little at stake locally. Their key goals – whether to buy a house or educate their children will all transpire in their residing country.

The only thing I wish to understand from such investors is what is their motivation to invest in India? If it is to provide some income for their parents or relatives, then investing in NRE deposits, having an NRE account and providing power of attorney (PA) for somebody locally to withdraw the money for their needs is a simple and efficient way to achieve this. Since NRE deposits and savings accounts and tax free, it is easy from a taxation perspective.

If the NRI’s intention is to keep money locally to serve local needs (even when you visit), this should suffice. Investing in property or other assets and the hassle of repatriating it later and losing on rupee depreciation are all avoidable. Participate in the Indian markets but know this: The MSCI India index delivered 9.5% in rupee terms in the past 10 years but returned just 5.4% in dollar terms. Please don’t tell me the Nasdaq 100 index did not deliver this! Use Indian markets to diversify, yes. But know that Indian markets are great only if the NRI eventually plans to use the money in India.

It is best to keep Indian finances and taxes simple, if the intention is not to come back.

Also, for the person residing locally (especially elders), managing the NRI’s finances, maintenance of property and making sure there is a PA for every single act may result in not-so-cordial relationships!

The ‘maybe’ category

This category of NRIs are the ones in a perennial dilemma – with their life and their money. I wish to tell them this: if you never had a clear idea or desire to come back to India, you probably will not!  Do not ‘concretize’ your investments in India, if you do not have concrete plans to come back.

I would say this category of investors should simply invest assuming they are settled abroad. They can look at dollar-denominated options to invest even if they are not in US. Please remember the long-term depreciation of the rupee against the dollar is 4-5% annually. Even if they decide to eventually come back, they would have earned 4-5% by simply holding in dollars instead of the rupee.

However, I am not complaining about them. For it is this category of investors who are doing their bit to fill our forex reserves. More dollars our way please!

This article first appeared in The Hindu dt. June 2, 2019