Looking for investing in India? Even though the traditional sources like PPF and NSC being closed, other opportunities are still available for investment. Few of many investment options for NRI’s in India are FD’s, Real Estate, Mutual Funds and Direct Investing in Stock Markets. Let’s discuss each of this to understand which one is the most lucrative options.
We listen to our parents telling stories about the home they bought when they were in their 20’s or 30’s. Does that mean you also need to buy/build your home at the same age? The market was in favor of them, but will it work for you too? They were in a phase where there was a real estate boom between 1988 and 1994 when people saw the value of their homes go up by 10 times. It was followed by a dip but picked right back up between 2002 and 2012.
But today’s scenario is quite different. With the constant appreciating prices of housing over the years creating a down-payment corpus, cost of getting a loan, and then returns being lukewarm (to put it mildly), many now prefer to rent a home rather than sinking in a sea of debt. Read more about real estate from our blog article “Why Did Real Estate Investments Work for My Parents and Why It Won’t for me”.
Real Estate, this year, is plagued with un-affordable prices, extremely low rental yields, rising Home loan rates, Builder Defaults, increasing government crackdown on black money and massive unsold inventory. We firmly believe that renting is much better than buying.
Therefore, real estate as an investment opportunity is ruled out.
Fixed Deposits (FD’s)
All of us would have heard of bank Fixed Deposits, popularly known as FDs. These are still a popular saving scheme for most Indians. In a fixed deposit, you save your money with a bank for a predetermined period (e.g. — 1 year) at an interest rate fixed (e.g. — 6.25%) at the time of opening. At the time of maturity, the bank pays back the savings amount along with interest. This interest gets added to your annual income. This is subject to income tax at your marginal income tax slab rate.
The bank also deducts TDS (Tax Deducted at Source) at 10% rate, if interest across all your FDs exceeds ₹10,000 in a fiscal year. Read more about FD’s and how the taxation on them affects the return form them from our blog article “Surprising — how Tax on FD and Bank Accounts reduces your returns”. Also, read about the pros and cons of FD here.
Hence, FD’s can be eliminated from our list of investment opportunities for NRI’s.
Direct Investing into Stock Markets
Investing in the stock markets (equity markets) can be very profitable in the long term. Equity Markets had a phenomenal run last year. The large-cap, mid-cap, and small-cap indices gave a return of 27%, 47%, and 58% respectively. Equities have given the highest returns over a period of time. Equity as an asset class has outperformed other asset classes over the long term like Real Estate, Fixed Income products (Bank Deposits, Provident Fund, National Saving Certificates) etc. Please refer the below table from a Morgan Stanley study done some time back on the returns of various Asset classes over a period of time and their comparison with Inflation.
Equities is a clear winner here. But investing in stock markets directly can be a bit challenging. Refer to our blog article about tips for investing in the equity market.
As I mentioned earlier investing in equity (stock) markets directly can be challenging. But does that mean common man with no knowledge in equity markets can’t (or rather, should not) invest in equity market? Well, that’s absolutely wrong. Anyone can invest in equity markets. Like they say, “When a door closes other doors open”. You have other options to invest in equity. Investing in equity through mutual funds can be very remunerative.
Read about the equity markets outlook for 2018 here.
With the new developments, it is even more imperative that Investors invest in Equity Asset class through Mutual Funds. Not only do they get the advantage of Fund management expertise but they can also avail tax benefits over direct equity investing through more tax efficient churning of portfolios by Mutual funds.
Investing in equity through mutual funds can be beneficial. Direct Stock Investments exposes your investment only to one stock. The gains are dependent on the news, market volatility, and sentiments. Whereas, in case of Mutual Funds your investment schemes are professionally managed by financial experts. Also, investing in equity Mutual funds through SIP is a good strategy. This can help you in averaging out any market ups and downs in the long term. This is especially true when markets are in the expensive or moderately expensive zones (which is now).
Benefits of investing in Mutual funds
Investments in MF have proven to be more effective because of the following reasons:
- Managed by professionals: Financial experts invest in equity and fixed income products invest on your behalf. They are supported by large teams which assist them in analyzing data and dissecting nitty-gritty of the markets which clients as individuals might not be able to do themselves. These include analysis of the macro and microeconomic environment, GDP rates, Interest rates and its future outlook, fundamental analysis of each company that they invest or not invest in.
- Better taxation structures: The government of India offers incentives to customers to invest in mutual funds by providing tax structures. While fixed deposit returns are completely taxable, investment in debt mutual funds come with tax indexation benefits. This can lower your tax burden to almost as low as 2% as opposed to as high as 30% in Fixed deposits.
- Better Flexibility: Mutual funds are held in units. So you can always redeem your investment partially while keeping the other investment intact and untouched. This is unlike fixed deposits. Where you have to fully withdraw your investment and pay pre-mature withdrawal charges on the entire amount.
- Better liquidity: Open-ended mutual funds can be sold anytime. This is unlike investment like Insurance, PPF, NSC, etc. where you have long lock-in periods and large pre-mature withdrawal penalties.
- Better Diversification: Mutual funds invest in multiple securities. This diversifies the risk for you much better than other investments.
Considering all these points, MFs are indeed the best option available to the NRI investors.
We at Upwardly.in are always there to assist.