Decide, but not only because returns are good
It was a hazy morning in Mumbai and the clear red billboard from an immigration services company offering permanent residency (PR) overseas caught my eye. A quick check online revealed that of the eight countries listed on their website as currently offering migration, at least six have an air quality index of less than 40 which is considered good. Mumbai’s air quality index on that day stood at an unhealthy 160.
But the advertisement wasn’t about a change in quality of life or possibility of better living standards. Here is what it said: "Invest in a PR VISA. Better returns than gold, land, mutual funds or FD." They were comparing mutual fund returns to a residency visa. I took umbrage to this unfair comparison. I placed a call on the number given and asked about returns linked to this PR visa. I was informed that they refer to it as an 'invest visa'. However, rather than talk about returns, they continued to ask me a lot of personal details about qualification, work experience, savings and so on.
The barrage of questions was the first hint that the advertisement was misleading. Technically, if you want to immigrate, one of avenues is to invest in a business or asset in that country. The related visa is referred to as an investor visa or in some countries as an entrepreneur visa. While there are finances involved, it is incorrect to compare this to investing in financial securities like mutual funds and fixed deposits in India. For one, it's not just an investment; it is also a decision about changing your lifestyle.
Second, there are moving costs; tickets, accommodation, and settling in a new location. Third, there are conditions involved like the length of stay in the country, the number of people you employ in your venture, the minimum investment amount, and so on. Lastly, we can’t ignore currency conversion.
Immigration is about moving your family across seas, not shifting funds across schemes in search for additional income or wealth creation. There is no similarity between investing money in an overseas business or franchise with an aim to immigrate, and buying an equity mutual fund.
What this advertisement did do was underline the trend of financialisaton of savings. Effectively, it is saying your opportunity cost is buying mutual funds (among other things like land and gold). This is an encouraging sign in terms of the recognition that mutual funds hold among citizens at large.
Other than the inappropriateness of the advertisement, what’s also worrying is that once again we begin by comparing returns, of unrelated products.
Often, returns comparison is used as the singular basis for choosing one product over another. Such an approach is incomplete and misleading. Here is a simple example. You find out that a 1-year fixed deposit (FD) from State Bank of India is giving you an annual return (interest rate) of 6.25%. You crib about the low rate to your friend, who informs you that Public Provident Fund (PPF) can give an annual interest rate of 7.8%. But if you dig a little deeper, you will find the comparison to be unsuitable. It is true that SBI is a government-owned bank and PPF is a government-backed scheme, and both offer a fixed rate of interest, but the similarities end here. The 1-year FD means you need to keep money invested for a year; opening a PPF account means keeping money invested for 15 years. FD interest is taxable when you receive it; so your post-tax return will fall to around 5.62-4.32% depending on your income tax bracket. Returns on PPF are tax-free. Lastly, only Rs1.5 lakh can be invested in PPF in a year, while ther is no such limit for an FD.
It gets trickier with market-linked products like mutual funds, because they can only show past performance and future performance is an estimate based on this.
What if your friend had instead suggested a balanced mutual fund in place of the FD? A balanced fund invests in both equity and fixed income, with an average historical return of 12% per annum; tax-free if the fund is held for at least a year. Some pay regular monthly dividends too. Once again, this is half information. What about risk? Investing in a balanced fund means you have to bear the volatility in equity markets. If equity prices fall for more than a few months, soon after you invest, your original investment value is at risk. Are you ready for that?
These are all meaningful details that the return figure doesn’t divulge. Prudent investing must be about more than chasing return. Here are some quick pointers to help you compare investment products.
Look for five basic characteristics: returns track record or offered return, cost or commission, suitable investment period or tenure, taxation, and lastly, return volatility or risk. Based on these, decide whether you want to invest in an FD or, say, a balanced fund; both are not interchangeable as many features differ.
There are qualitative overlays as well, which advertisements can overlook so easily. Think of your financial goals, ability to stomach the volatility in market-linked products, need for regular income, track record of the issuer and asset manager, among other things. It’s the qualitative overlay that needs needs careful thought; the return numbers usually speak for themselves.
I wonder what makes the PR visa investment more lucrative than other investment avenues? Here too, it gets complicated when I think about qualitative aspects—living among strangers, starting afresh, catering to kids’ education costs.... On the other hand, we need better air quality, better roads, and cleaner cities. So, a return may be a definite number, but we know now that it’s just not enough.
Lisa Pallavi Barbora is a consultant with Mint.