Despite slowing growth and deficit challenges, India remains a destination for global investment. Foreign institutional investors (FII) clocked in net investment of around $24.5 billion in equity and nearly $6.8 billion in debt in the calendar year 2012. In fact, for equity this is the second highest net inflows seen in any calender year since the doors to FII investing were opened in 1993-94. This reflects the return potential from an economy where earnings are still growing at 15-20% for large-cap companies.
Add to this the fact that while the rest of the world has been moving in the direction of monetary easing and interest rates in developed nations are extremely low, in India with repo rate still at 8%, potential returns from one-year fixed deposits and short-term income funds are 9-10%. Of course, the currency risk remains.
How do you benefit from this growth if you are an Indian but live abroad? It’s got easier than before for you to invest in Indian financial products with a well-defined investment process and reasonable tax treatment.
Begin with mutual funds
Whether you pick fixed income or equity will of course depend on your objective. If the money being invested in India is long-term surplus, then it’s better to go with equity. At the same time, don’t ignore fixed income funds. In low risk, low duration fixed income funds such as ultra-short term funds and liquid funds, you can comfortably earn around 8-8.5% per annum.
At present though, rupee denominated non-resident (ordinary/non-resident (external) or NRO/NRE fixed deposits may score over fixed income MFs as the interest earned (currently around 9%) is not taxed. Says Raghvendra Nath, managing director, Ladderup Wealth Management, a financial planning firm, “Fixed deposits are popular among non-resident Indians or NRIs as the rate of interest at around 9% is attractive, tax treatment is favourable and they are easy to manage.”
Having said that, the present day investment environment favours bond funds with long duration given that interest rates are widely expected to come down over the next few months. Right now such funds are giving annualized returns of around 10-11% and if the easing cycle begins sooner than later, they present a good opportunistic buy for you.
While fixed income is an easier choice, comparing interest rates premium across countries is somewhat simpler and more obvious than determining the value of a stock or your fund manager, but you can’t ignore long-term benefits of investing in equity funds. In the last 10 years, average compounded annual growth rate (CAGR) from large-cap equity funds has been around 20% and that of from equity funds, which have exposure across market capitalization, average around 25% CAGR. So far though returns alone have not been a deciding factor. According to Prateek Pant, director, products and services, Royal Bank of Scotland Private Banking, “Among south east Asian NRIs bank deposits are popular and acquire a fairly large proportion. Equity does not much flow as dollar-adjusted returns are not so superior; investments made in Singapore have done better on a dollar-adjusted basis.”
While that’s a valid concern in the near term, in the long run, company fundamentals are important and a growing economy like India can present good investment opportunities.
The process for you to get started in MFs is actually quite well defined. However, when it comes to execution, there may be a few things to consider. This is how your process begins. If you have a repatriable NRE account or a non-repatriable NRO account, where only interest is repatriable, you will be able invest in MFs via these. You can only invest via rupee denominated NRE or NRO accounts as MFs in India are rupee denominated.
Investments can be made through cheques, drafts or via direct debit. Similarly, redemption amount can also be directly credited to the NRO/NRE account. There are certain know your client (KYC) requirement you need to complete, which essentially include filling in a valid form, giving a valid identity proof like PAN card (may need to be certified by the Indian embassy), a certified copy of your passport and address proof for the overseas residence. There is also a new requirement of in-person verification for new investors or if you are investing in a scheme from a fund house you haven’t invested in before. This can be bothersome for NRIs as it means you have to be physically present in India.
Moreover, says Pant, “It is cumbersome to get forms signed and have all the paperwork in place for every successive investment. NRI investors need to be ready to operate through power of attorney (PoA) for specific investment products which can be used by the advisor to execute transactions.” PoAs have to be registered with the asset management company (AMC) and can then be used by advisors to invest on behalf of the client after the advisor has received some form of authorized instruction via a recorded phone call or an authorized email or some such way.
You have the option to go online to an AMCs website and invest directly, however, then the onus of choosing the right fund and evaluating a comprehensive portfolio across schemes will be on you.
Be mindful of taxation
Overall the provisions pertaining to taxability of capital gains provisions remain the same for India residents as well as NRIs. However, many countries have a double tax avoidance agreement with India and this will come into play while determining the overall tax liability of income earned through investments made in India.
Says Parizad Sirwalla, partner, KPMG, “Once the tax liability as per provisions of the Indian domestic tax law is established, tax benefit, if any, under the Indo Singapore Treaty for an NRI in Singapore is based on detailed examination of the clauses of the relevant treaty and tax residency provisions under the respective law.”
Says Pant, “Tax plays a very big role. India has double tax avoidance agreement with many countries which has to be kept in mind and to that extent the higher of the two tax rates has to be paid.”
All said and done, Indian equity and fixed income MFs offer attractive returns. Once you have established your objective, some investment can be routed here as well. At present, a very small portion of the overall NRI investment surplus gets routed to India, say experts.