Investment Guide for NRIs- A wholistic approach

I get a lot of communication from my NRI friends on investments. As usual, all the calls comes with a common quest for the  best fund to invest or how to invest in stock market which gives a good return. 

Since I had  worked in Saudi for a short period of time, I can understand the possibilities and limitations faced by NRIs. So in this article , I am trying to give an overall view of the savings & investment options that are necessarily required and available for them. The information here will be more suitable to NRIs living in the Middle East & Far East or NRIs who have a plan to return to their mother land to spend their retired life.

Health Insurance

Always  remember that, Health is  the real wealth . Illness and treatments can wipe out one’s savings. But sadly health insurance remains  the most neglected area among NRIs, the reason being  simple, as most of the expat workers are provided with health insurance by their employers which provide global coverage including OP cases. So people  working abroad never buy health insurance packages applicable in India, thinking that they can join health insurance once they return to India.  

But in India, the health insurance system works differently. Minimum 24 hours hospitalisation is needed to claim insurance benefit. Moreover it does not cover OP expenses. Currently few insurers are offering OP coverage, but the premium charged is relatively high. Also there is a specific waiting period of two years for certain treatment & procedures like treatment for kidney stone, cataract, hernia etc. , which is common across all service providers. Here the major service providers insist health checkup after a particular age -in some above 45  and others, above 50 years. If one is diagnosed with any disease or declare an existing disease, even if it is  in the acceptable range, the insurers will issue policy by making exclusions of these illnesses for a particular period and may also  charge additional premium. Hence it is advised to get a health insurance  earlier, while you are working abroad. Going by the current trends, the health care expense in India will definitely go high and so, it is ideal to augment the coverage by opting for Super Top Up policies.

Investments

Investments are different from regular savings. Main objective of investments is to counter inflation (price rise) and to meet future financial goals. A proper investment makes money available for you whenever your needs. If an NRI is earning an income by making an investment in India, he is liable to pay income tax on that income. So income, either from  investment/interest earned from property/gold/stocks/mutual funds/debentures/bonds are liable for tax. Only the interest earned from NRI fixed deposit and income from Insurance remains tax free.

The investments can broadly be categorised into two -Physical & Cash Investments.

Investments in property, precious metals like gold, silver or artefacts are physical investments while the investments in Fixed Deposit, Company Deposits, Insurance, Stocks, Equity & Debt mutual funds, electronic gold are considered cash investments.

Real Estate/Property

Real estate remains one of the favorite investments among NRIs. The options are buying land/villa/apartment / commercial building etc. Here the investor gain in two ways-by earning regular rental income and/or by capital appreciation. Most of the people are emotionally connected with property investment. Considering the changed economy and the requirement of huge investment amount, it is not an easy option for all. On top of this, there exists the risk of fraud by builders. However, in many cases, I have seen that more than creating assets, it creates a long term liability.

Gold

Investment in gold still remains a good option. However, when buying gold in the form of ornaments or coin, the investor incurs additional cost in terms of tax, making charges etc. So, the better choice is to invest in gold electronically. Those who have got demat account can invest through ETF and others can invest through gold mutual funds. This can save money paid in terms of GST and other related charges.

Fixed Deposit-NRE/Company Deposits/Bonds

Fixed Deposits offer a guaranteed rate of interest for the specific term. Interest earned from FD in NRE account is tax free whereas interest from Company Deposits/Bonds are liable for tax based on the overall income. Considering the current rate of interest and inflation (price rise of goods), opting for FD for a long term, even with tax free interests, is not attractive any more. 

Another fact is that,  is once you are back in India on a permanent basis, over a period of time , the NRE account needs to be recategorised as a Resident account. In such a scenario all the earning interest  become taxable. So it is preferred to diversify into other tax efficient investment,  for the goals with a longer horizon.

Insurance

Before considering insurance as an investment, everyone should have sufficient life insurance. This is the only investment, which can save the family from financial disaster  in case of an fatal eventuality and maintain the family lifestyle. The other benefit of insurance as an investment is that it offers tax free returns. In line with the changing trends. Insurance companies offer plans that comes with limited payment period with option of getting back money on lump sum basis as well as on monthly income basis.

Stocks/Equity Mutual Funds

Investment in stocks/equity mutual funds can generate the highest returns among all investments. However, most people consider it risky. In my opinion, the risk is from impulsive reaction to the daily market conditions. 

Before investing in equity market, one need to understand that equity market is not an investment option for short term goals but for long term goals which are more than 7-10 years away like retirement etc. Direct equity investments can generate higher returns compared to mutual funds, but selection of stock is a real challenge.  If stock selection is not carefully done, the chances of losing money is high. For such investors, the ideal option is to invest in equity markets through mutual funds. Investors can either take the guidance of mutual fund distributors or invest directly in mutual funds. Mutual fund offers the convenience of flexibility in terms of investment amount, mode of investment and investment period. One can make regular monthly investment on a monthly/quarterly basis or invest in lump sum mode. Similar convenience is also offered while withdrawing money . In addition income equity market offers are more tax efficient. 

Conclusion

In short, there is no specific formula to decide on how  to invest or where to invest, as it varies from person to person based on his needs. Here, Earlier the better is the mantra to be followed.  Even while doing so, the priority should be on  taking life insurance, health insurance and then diversifying  into other options.

 

To get more details on the investments, insurance etc. please call contact George Jacob on 8547442952.