With the Indian economy on an upswing again and out of recession, non-resident Indian investors are being encouraged to increase their engagement with the market to benefit from emerging opportunities.
The positive news is that the Indian economy’s growth outlook is bright; as economic activities resumed, the government increased capital expenditure and lockdown restrictions eased significantly.
India’s gross domestic product grew 0.4% on a year-on-year basis in the quarter ending December 2020, according to data released by the National Statistical Office.
Foreign and domestic investors show much confidence in the Indian markets which translated into a prolonged bullishness. The benchmark stock index Sensex is hovering near the 50,000 points mark, and the impression is that key sectors will be coming up with improved results in the current quarter.
With the easing lockdown restrictions, the pickup in economic activities, increase in consumer demand and benign inflation, India will continue to remain an attractive destination for foreign institutional investors.
Wealth creation strategy
Advisers are suggesting that investors adopt a wealth creation strategy with a long-term perspective that involved monthly investments in high growth stocks.
Among the various options suggested are mutual funds through systematic investment plans (SIPs), fixed deposits (FDs), debentures, non-convertible debentures (NCDs), bonds and property.
“Investors with a long term perspective, say up to a three-year horizon, can look at corporate bonds and debt funds. Still, the SIP route is highly recommended for retail investors to taste success in mutual fund investing. Here are also cherry-picking opportunities now and for some more time as the growth outlook is positive,” said Manoj Vallikudiyil, managing partner at Manjul Associates, securities and investment consultants, Dubai.
Fixed deposits have always been the most favoured investment tool for NRIs who look for somewhere safe to park their funds, though the returns are comparatively low. This could change in 2021 as interest rates on fixed deposits could start inching up. Deposit rates are set to go up by the second half of 2021.
Some banks and non-banking finance companies have already started increasing deposit rates across tenures, especially rates on longer term FDs.
“Macro-economic indicators point towards a rise in deposit rates starting from the second half of the FY 2021-22. Til then, depositors should keep their money parked in shorter tenure FDs to retain the flexibility to shift their savings to higher rates once the rates begin their upward journey,” said Vallikudiyil.
No to international funds
Another piece of advice is that NRIs are advised not to invest in international funds owing to additional currency transaction costs.
Also, they should be aware of their tax liabilities when investing in mutual funds and be clear whether they are investing in a debt-oriented or equity-oriented scheme.
NRI investors should also make sure that the underlying funds in equity-oriented schemes only invest in Indian companies.
They should also keep the exchange rate fluctuation and taxation in mind when looking at investing into the Indian mutual fund industry.
In equity or an equity-oriented fund, the tax rate below 12 months is 15% plus surcharge, depending on the taxable income in India.
If the taxable income is below INR 5m (£48,904, $68,078, €56,516), no surcharge is applicable.
Long-term capital gain tax on equity-oriented mutual funds above 12 months is 10% plus surcharge, plus 4% cess.
The long-term capital gains tax is below 12%.
When investing in non-equity-oriented mutual funds, below 36 months, there is marginal tax.
If it is short term, ie below 12 months, the mutual fund will deduct 30% tax on short-term capital gains and deposit with the exchequer.
The investor can claim it back if his tax outgo is lower.
The weaker rupee is a trigger to invest more in Indian property market.
More than investments, many NRIs are buying property for end-use. In fact, this trend was seen since the beginning of the pandemic, as evidenced by a recent study which said 38% of those booked property in India in 2020 were NRIs.
A south Indian real estate company said apartments and villas sold to NRIs went up 40% since the pandemic struck, compared to the previous year.
The rupee is expected to depreciate further with crude oil prices rising and the Reserve Bank of India adopting a no-intervention strategy. This will again prompt NRIs to put their money in property.
Further, the housing finance rates are coming down drastically so that they can go for their dream houses at affordable rates.