Most NRIs turn to Indian Fixed Deposits to invest in India. India has one of the highest FD rates in the world with most banks offering FDs in Non-Resident External (NRE) and Non-Resident Ordinary (NRO) accounts around 7.5-8.5% per annum. In most other countries, these rates are less than 4%.
Because of this, many NRI’s just wanted to park their funds in Fixed Deposits. There have been cases when NRIs have taken loan from the country where they reside and put in FDs in India. But the depreciation in Rupee takes away most if not all gains in FDs, (Over the last 5 yrs, INR has depreciated over 40%; 7.25% annualized). Fixed Deposits are a good bet but not the only bet for NRI investment. A tax-free bank fixed deposit sounds like an attractive deal, but you have to consider how much you want to allocate. Fixed deposits usually have a lock-in or a penalty for withdrawal before maturity, so if you need those funds in a year’s time and the deposit hasn’t matured your deal won’t be that good. Real estate is not easy to sell in case you need immediate liquidity.
The power of asset allocation
In a country as economically vibrant as India, the right asset allocation can help NRIs take advantage of their higher investible income and generate higher returns than just putting money in FDs. This allows you to generate funds to meet your financial goals.
Let’s say, you want to send your daughter to study a course 15 years later that costs $100,000. Assuming the fee will increase to $250,000 then, unless you invest that $100,000 today at a post-tax rate of around 6.5-7% per annum, you will not be able to achieve this goal. So the next step is to choose an asset allocation, which could be a combination of fixed deposits, equity and even real estate.
Allocation minimizes your loss when returns fall in one asset class. Relative to other assets, Equities have given better returns in a period of 10-15 years. Just to protect the downside, it would be advisable to spread your investments in various asset class such as deposits, gold , bonds and fixed income securities. This will ensure that your portfolio in less volatile and at the same time your over all returns match your requirement.
Also, regular rebalancing of a portfolio is very important. Markets don’t remain static year-on-year and your portfolio shouldn’t either. When the markets gets volatile you may have to have an additional tactical allocation till the interim things gets settled.
Investing in Indian assets can be either beneficial or detrimental for you depending on how you approach it. Without realizing it, you may be losing out on an opportunity for higher portfolio returns, simply because your allocation to Indian investments is a small part of your overall investment kitty