Best Investment Opportunity in India : The Indian economy has dominated the stage in Emerging markets after China since the onset of the financial crisis in 2008. The hidden gem is no more a discovery story but promises stellar potential ahead in the coming 2 decades anticipating an organic growth in consumption as the population continues to grow and so does the disposable income in the hands of the burgeoning middle class.
We have witnessed a phenomenal growth in lifestyle products, fashion industry, education sector, automobiles, dining, holiday planning and an erstwhile performing real estate sector which has been going through a benign phase in the last 5 years. The government has allocated significant budgets in the last 4 years towards defense, infrastructure, basic requirements such as sanitation, financial inclusion for the under privileged sector, smart cities etc. Infrastructure being a broad term, the government has focused on roads, highways, housing for all by 2020 in addition to creating a business friendly environment for foreign investment.
The potential and the foreign interest created is evident from the growth in financial markets, spike in real estate prices, new foreign entrants in the local market, enhanced digitalization etc. in the last 2 decades mainly from 2004. Whilst it is clear that China has leaped ahead of Indian economy in the same time frame, India has remained a strong competitor to attract foreign flows which has boosted our forex reserves and placed us as the 6th largest economy in terms of GDP.
Investments Opportunities for Non Resident Indians
1. Bank Fixed Deposits
Fixed deposits (FDs) are amongst the most popular investment choices for NRI’s. Fixed deposits for NRIs can be placed under NRE, NRO or FCNR accounts. NRE Deposits proceeds can be repatriated without any limit, whereas NRO FDs are restricted to RBI regulations. FCNR accounts and deposits are maintained in foreign currency of your choice, but most popular are USD/Euro deposits owing to the stability of these currencies. Interest rate varies on currency and RBI regulations. Risk: Low Returns: Low
2. Direct Equity
This is the highest risk, highest return for investors amongst any asset class. The fundamentals of investing in direct companies involve thorough analysis of the entity’s financials, market position, industry analysis, sectoral exposure etc. This requires a certain level of commitment and time spent on a daily basis to secure profits.
Any sales prior to 1 year will attract a short term capital gains tax with a TDS of 15% and over 1 year will be considered Long Term capital gains and tax will be charged accordingly. Please consult your advisor for updated STCG/LTCG tax calculations.
Risk: High Returns: Phenomenal
3. Equity and Debt Mutual Funds
Mutual funds are an exciting investment option for NRIs regardless of their investment plans. Mutual funds are available for short term, medium term or long term; there is no dearth of mutual funds that match your investment goals perfectly. NRIs can invest in all categories of mutual funds – Equity, Balanced, Debt or Liquid. However, the selection of funds is a function of one’s risk profile and investment horizon. To invest in mutual funds in India, NRIs will need to have either an Indian Rupee NRE or an NRO account. There are plenty of online/offline channels available for investments.
Historically top performing equity funds have delivered between 15-20% annual returns while debt funds have stayed in the range of 8-10% per annum on an average.
Advantages for retail investors – The capital markets as a phenomenon are very diverse and the directions change very swiftly for a retail investor to grasp every movement. This may lead to lost opportunities or even taking incorrect decisions. Mutual funds are the right product for a retail investor who has a risk appetite but may not be able to undertake efforts to capitalize on the short term trends. Therefore, fund managers appointed by the fund houses are well trained and experienced to protect the downside in a falling market and achieve the highest return possible in a rising market. Tax Liability on MF is precisely the same as Resident Indians, however applicable TDS will be deducted for NRI accounts.
Risk: Moderate Returns: High
Offshore USD funds – Best possible tool to take exposure in Indian market and hedge any movements against the currency depreciation –
Investing in mutual funds is the most appropriate route for a retail investor and keeping those investments denominated in foreign currency such as USD is an added advantage only available to NRI investors. These funds invest in the Indian market through their fund houses in India and the investments are rated in USD which enables us to ride on the currency movement in addition to the market performance.
Historically, the funds have generated a return of over 50% in 2016-2017 when the midcap and large cap portfolio had witnessed an extensive run and the USD had also appreciated marginally. During 2018, markets have witnessed a downfall owing to the downside in INR/USD wherein the INR has depreciated by over 10% and the markets have corrected by 20%; in contrast the USD finds have generated a 5% return in the same timeframe. Therefore, an NRI who invested directly in Indian equities may have lost 30% during 2018 whereas the offshore investor has gained 5% in the same timeframe. This benchmark is relatively low in comparison to the 1 year and 3 year benchmarks which can be presented upon request.
Risk: Moderate Returns: High – Phenomenal
4. Real Estate
Indians love investing in real estate and NRIs are no different. In fact, for most NRIs, having a home back in your own country is an emotional investment. Real estate in the past has given reasonable appreciation and can be a lucrative long term investment for wealth creation. NRIs can purchase both residential and commercial properties.
Risk: Moderate Returns: Low
5. Government Securities
A government security is a tradable instrument issued by the Government of India to raise funds for development or for special projects.
These funds can be short term (usually called treasury bills or T-bills with maturities of less than a year) or long term (usually called government bonds or dated securities with maturities of one year or more) and carry a sovereign guarantee backing them.
Risk: Low Returns: Low
6. Bonds and Non-Convertible Debentures (NCDs)
Just like government issues securities to raise money, both public and private companies do so as well to raise capital.
PSU bonds are generally considered to be less risky while private bonds will have a wide spectrum of risk associated with them. Non-convertible debentures on the other hand, are secured debt and are issued by corporations with the backing of its assets.
Risk: Low Returns: Low
7. Certificate of Deposits
Certificates of deposits (CDs) are non-negotiable money market instruments issued in demat form or as promissory notes.
They are like fixed deposits, but have a higher liquidity as they can be freely transferred from one person to another. CDs are issued in India by scheduled commercial banks or financial institutions. These certificates will yield a higher effective rate of return as compared to most bank deposits.
Risk: Low Returns: Low
8. National Pension Scheme (NPS)
NPS is a cost-effective and government backed voluntary defined contribution retirement savings scheme. Any NRI who is still an Indian Citizen and is aged between 18 to 60 years can avail of this scheme by opening an NPS account.
Risk: Low Returns: Low
Investments Opportunities for Foreign Nationals/Entities.
Form an Indian Company
Overseas companies can form a private/public limited company under company act; operate as joint venture operations, wholly owned subsidiary, liaison office, branch office or project office. The basic requirements to open business entities are:
- 2 person (for private limited company) or 7 people in case of public limited company.
- One Director must be Indian Resident.
- Indian Address
- Registration of the company with Registrar of companies.
- Reporting to Reserve Bank
FDI in Limited Liability Partnership
Limited Liability Partnership (LLP) is most preferred route for Foreign Direct Investment, as it less complicated compared to forming Pvt limited or public limited company. LLP requires pre-approval form govt of India, There are certain sectors like agriculture, plantation, print media, where 100% FDI not allowed. With the government of India Make in India campaign more and more sectors are being opened for FDI investment.
We tried to cover most of the topics, both for NRIs and Foreign Nationals. However in-depth covering would be beyond the scope of this article. In case you have any further queries/clarifications or require any advice , please feel free to contact, it would be my pleasure to help. Happy Investing!
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