The unpredictable nature of markets and global volatility advocates for diversification, but not everyone agrees. The late investor Charlie Munger argued that diversification, or ‘diworsification’ as he called it, is for the know-nothing investor, leading to mediocrity. However, what worked for Munger may not yield a happy ending for other investors.
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For example, a Non-Resident Indian (NRI) investor, residing miles away, finds it challenging to monitor events back home. Making the right investment decision for the NRI amid an overload of information can be as difficult as booking a flight ticket back to India during peak summer season.
Despite these challenges, avoiding investments in one of the fastest-growing economies is not ideal. Hence, investing in India across asset classes not only leads to seamless diversification but also acts as a global hedge for their portfolio.
India’s overseas diaspora is 32 million strong, with 13.6 million NRIs and 18.6 million Persons of Indian Origin (PIOs). Inward foreign remittances to India grew 26 percent to $112.5 billion in FY23, pointing to the fact that NRI investments in India are at the cusp of a breakout. NRIs are increasingly choosing to invest in India as many return after retirement, visit for medical treatments, or simply want to benefit from growth opportunities and policy reforms.
Portfolio diversification is like a balanced diet for NRIs, with a well-diversified investment portfolio consisting of different asset classes, such as stocks, bonds, real estate, and commodities. Each asset class behaves differently under various market conditions, so having a mix helps mitigate risk.
First, insurance
NRIs looking to start their investment journey in India should first take care of insurance – Term plans as well as Health Insurance. In case of term plans, the insurance cover should be at least 10 times of your annual income. Ideally, one should look at a cover of 20 times his/her annual income.
Non-life insurance such as medical insurance is also important because India provides cost – effective medical treatments. India has been attracting over a million medical tourists every year.
All things equities
NRIs with long term investment horizon can consider having higher allocation into equities. As per finance ministry’s projections, India is set to become the third-largest economy in the world , potentially reaching $7 trillion by 2030 on the back of demographic advantage, China+1 theme and Aatmanirbhar Bharat initiatives. These developments are expected to positively impact Indian equity markets
At present, large-cap stocks valuations appear to be more favourable compared to mid and small caps. The Nifty Midcap 100 has rallied over 57% in the past one year, Nifty Smallcap 100 is up 63% while Nifty 50 is up 26%.
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Anticipating interest rate cuts by the Federal Reserve, foreign institutional investors are expected to re-enter the market, typically favoring large-cap stocks. Therefore, NRIs initiating investments now may benefit from allocating a larger portion of their portfolio towards large-cap stocks.
NRIs, who are more aggressive with their investments, can also consider Investment banking deals such as selected Preferential share allotments. But, keep in mind that SEBI has a 6-month lock-in period on the allotted shares.
Mutual funds versus PMS
NRIs are usually high networth individuals (HNIs) so the minimum threshold of Rs 50 lakh for investing in PMS funds is not an issue for them. India’s alternative investment industry, encompassing Portfolio Management Services (PMS) and Alternative Investment Funds (AIFs), has experienced a compounded annual growth rate (CAGR) of 26 percent.
But keep in mind that any churn done by the PMS fund manager is taxable on the hands of the investor. On the other hand, since mutual funds are registered as trusts, investors are taxed only when redemption takes places. So from a taxation perspective, mutual funds might be a better option for NRIs.
Mutual funds also give exposure across asset classes – be it long-term or short-term debt, gold, corporate papers, cash as well as equity exposure. That said, certain Asset Management Companies don’t accept mutual fund investments from NRIs based in Canada and the US as the rules are more stringent.
Debt and real estate
NRIs generally do not look at India for debt investments. The risk-free rate at around 6.5% – 7% is not lucrative as currency depreciation and conversion fees will eat up most of the gains made. However, NRIs have the opportunity to explore high-yielding corporate paper through mutual funds.
When it comes to Real Estate, NRIs are no strangers. Their contribution to total real estate investments in India has been growing steadily, projected to reach 20 percent in the next few years. Keeping in mind that exit is difficult, NRIs should go with the established and reputed developers if they are looking at the real estate investment.
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Ideal allocation
Asset allocations mainly depend on one’s risk profile, investment time horizon & financial Goals of investor. Happy investing!
