NRIs too need to shift from physical to financial savings

With real estate, NRIs' favourite investment vehicle in the past, unlikely to do well in the near future, there is a strong case for them to shift to equity and debt mutual funds

Most non-resident Indians (NRIs) are aware that the fast-growing Indian economy offers unprecedented investment opportunities. However, in the past, most of NRI money has flowed into real estate. While the Indian markets present enticing opportunities, the problems associated with documentation, getting started, and managing their portfolios has kept a large proportion of NRIs away from the markets. However, the picture is changing and the time is ripe for NRIs to make mutual funds their preferred investment vehicle. The advent of online investment platforms has made it easy for NRIs to manage their mutual fund investments in India while living abroad.

Real estate no longer the default choice

Housing or real estate was a popular mode of investment for non-resident Indians (NRIs) until five-seven years ago. High capital appreciation seen in the nineties and the first decade of this century along with monthly rental income led to NRIs gravitating towards housing.

But the scenario is quite different today. The real estate market has given poor returns over the past decade. Housing prices have either fallen or remained flat in the top cities over the past five-seven years, while rentals have stagnated. Often finding a tenant for properties proves difficult. A large number of properties owned by NRIs stay vacant for extended periods of time.

Moreover, prices may not rise anytime in the near future, given the excess supply in most Indian cities. Real estate is also an illiquid investment. NRIs who need to sell a property urgently should be prepared to sell at a discount of 20-40 per cent on the market price. Real estate is currently plagued with unaffordable prices, low rental yields, rising home loan rates, builder defaults, government crackdown on black money, and massive unsold inventory. Thus, it is no longer a wise investment choice for NRIs.

There are, however, pockets that have a demand- supply mismatch. The commercial segment is doing better than residential. If there are specific markets that NRIs understand well, they can consider those options selectively.

Equity and debt mutual funds a more attractive option

India is one of the fastest growing economies in the world with growth rates averaging over 7 per cent in the past five years. Both IMF and World Bank are projecting that this growth rate will continue in the near future. The growing economy has resulted in a robust capital market. The primary market has also been buoyant. According to a Morgan Stanley report, India’s total equity market capitalisation is expected to grow 2.5 times to $6.1 trillion by 2027. This rapid growth in market capitalisation should translate into high returns for equity investors.

India is also among the fastest growing consumer markets in the world. Discretionary spending is on the rise and will continue to grow in the coming years, given the country's attractive demographics. The recent taxation reforms should also contribute to growth in spending on services and consumer durables. Companies in FMCG, consumer durables, auto and consumer finance, and their stocks, stand to benefit.

All this creates a strong case for investing in the Indian equity markets. Mutual funds offer access to professionally managed investments in the equity markets. Several good equity mutual funds in India have given over 20 per cent compounded annual returns over the past 20 years, outperforming indices like the Sensex and the Nifty. Given the growth potential and the stellar past performance, there is a strong case for NRIs to invest in equity mutual funds in India.

Interest rates in India have been higher than that in the US and other developed nations. Risk-averse NRI investors can generate better returns in debt funds compared to leaving money idle in US banks. Debt mutual funds are more tax efficient than bank FDs. They can easily give investors 100-250 basis points extra returns over Indian bank FDs.

Modus operandi for investing in Indian MFs

NRI citizens and foreign nationals who have a valid Indian PAN card and a rupee designated NRE/NRO bank account can invest in mutual funds in India. If NRIs invest via NRE or NRO bank accounts, the redemption proceeds can be credited back to their respective accounts. NRI mutual fund investments done through NRE accounts are fully repatriable to the country of residence (see box for documents that NRIs need to submit to get KYC done for investing in India). Many online investment platforms provide completely online KYC and investing solutions for NRIs.

Pay TDS on capital gains Taxation of NRIs investing in Indian mutual funds is the same as taxation of resident Indians. The only difference is a 10 per cent tax deducted at source (TDS) on capital gains for NRI investors at redemption. Equity investments in India are taxed at the rate of 15 per cent for short-term capital gains and 10 per cent for long-term gains. Any investment of above one year qualifies as long-term capital gain.

The tax rate on short-term capital gains from debt mutual fund investments in India is the same as the investor’s income tax slab. For long-term debt investments, the tax rate is 20 per cent with indexation benefit. This effectively reduces the net tax rate to 8-10 per cent owing to inflation. A debt fund investment redeemed after three years qualifies as long-term capital gain.

NRI investors should not worry about double taxation. India has signed the Double Taxation Avoidance Agreement (DTAA) treaty with many countries, including the US and Canada. Hence, any tax paid in India can be claimed as credit in the US/Canada tax returns. Find out if India has a DTAA treaty with the country of your tax residence and consult your tax advisor for more guidance in this regard.

The writer is founder & CEO, Upwardly.in