Asset Allocation for NRIs When Investing Back in India

Asset allocation for NRIs involves dividing their investments across various asset classes, such as stocks, bonds, cash, and real estate, strategically to balance risk and reward. This process becomes more complex for NRIs as compared to Indian residents due to the financial considerations involved in managing wealth across borders. 

While residents face a single tax system and currency, NRIs must navigate global income, fluctuating foreign exchange rates, diverse regulations, and tax obligations in both India and their resident country. Factors like repatriation rules, investment restrictions, and compliance requirements, such as FATCA, also impact their investment asset allocation. 

It is important to find the right balance between Indian and international investments to reduce risk, manage market volatility, and achieve long-term financial stability. Keep reading the blog to know more about how to plan a thoughtful asset allocation investment strategy that supports wealth creation, retirement planning, and maintains connections with India while complying with global regulations. 

Problem in Balancing Between India vs Your Host Country

An NRI is allowed to invest a minimum of 5 to 10% of their income in India. However, the problem here is that how much you invest will be determined based on various factors, like whether you plan to return to India or wish to stay in your country of residence. 

• If you are planning to move back to India :

You must gradually increase your allocation to Indian assets to prepare for eventual retirement in India. This investment strategy required dynamic asset allocation adjustments as you approach your planned retirement date. Try to focus on high-return equities at first, and after that, prioritize protecting capital and steady income when you get close to retirement. 

• If you are residing abroad:

Investing in Indian markets can be an ideal way to diversify your portfolio across borders if you plan to retire outside India. For diversification and scope for growth, hold 20 to 40% in Indian assets. 

Additionally, remember that NRIs from the UK and the Gulf have the option to allocate a significant portion of nearly 20 - 30 % for UK and 40 -50% Gulf to Indian investments. The suggested allocation may vary depending on your country of residence. 

Why are the NRI Asset Allocation Rules Entirely Different? 

An NRI is liable to manage wealth across two economies that have different currencies, growth cycles, and tax structures. The main challenges faced by NRIs are:

• Tax Obligations: Understanding tax implications on capital gains and TDS (tax deducted at source) can be stressful. Hence, NRIs often end up neglecting taxes. 
• Oversight and Distance: You need to use different strategies when managing investments remotely than when using a hands-on approach. 
• Money Repatriation: Transferring money across borders is not always easy and may be subject to various regulations. 
• Currency Concentration Risk: NRIs often overlook this. They assume "Fund has provided 15% return, " which means they made 15% in their home currency. However, the truth here is that they didn't. The rupee has depreciated 10% over three years, consuming half of your returns. 

Allocation Based on Investment Timeline 

The timeline of your investment significantly impacts your allocation strategy. Here is how it matters:

More than 10 Years to Return 

• 20-30% stable assets (debt funds, GIFT City FDs)
• 70-80% growth assets (equity mutual funds, growth stocks)

Nearly 5-10 Years to Return 

• 30-40% stable assets
• 60-70% growth assets. 

More than 5 Years to Return 

• When your returns come closer, it slowly shifts from high-risk to low-risk assets, aligning your investment strategy to your goals, whether you are seeking regular income or long-term wealth appreciation. 

Currency Risk Management

This builds a lot of confusion amongst NRIs. Remember that you can't avoid currency risk, but you can manage it by accepting it as a part of investment in India. 

Indian rupee depreciation is offset by higher Indian GDP growth and mutual fund returns over the decades. Try to diversify across currencies. 

Avoid putting 100% of your wealth in INR-denominated assets. Hedge with GIFT City Investments. 

Practical Hedging Strategies: 

• Monitor exchange rates using online trackers. 
• Keep 30-40% assets in your earning currency (USD/AED/GBP).
• Use GIFT City Investments to get INR exposure without facing any currency risk. 

To understand it easily, let's consider a real example. Diversified NRIs lost nearly 5-8%, while INR-concentrated portfolios dropped 15-10% during the rupee crisis that occurred in 2013. 

What are the Asset Classes Available for NRIs?

Here are some of the Indian assets that you can access to build your NRI portfolio:

• Real Estate: For those who assess in detail and are planning to move back.
• Fixed Deposits: Using NRE/NRO accounts of GIFT City USD deposits.
• Gold: It is advised by financial advisors to allocate 5-10% of your portfolio to gold holdings using gold ETFs and gold mutual funds.
• Equity Mutual Funds: A balanced approach works best for equity mutual funds: 60-70% Indian equity funds, 10-20% international funds, and 10-30% debt funds, adjusted according to your age, risk tolerance, and specific goals. 

Assets from the Host Country: 

• Local equity and bond markets
• Emergency funds in local currency
• Real estate (if staying long-term). 

Strategies For Tax-Efficient Asset Allocation

 Wasted thousands by paying double tax for two years? This mistake highlights why tax planning must involve allocation decisions:

NRE Account Strategy 

• Fully repatriable investments 
• Tax-free interest on fixed deposits
• Ideal for foreign-sourced funds

GIFT City Advantage 

• Tax-free returns for NRIs
• Professional fund management options
• USD-denominated, eliminating currency risk

Ensure to check the benefits of the DTAA treaty with your country to improve tax treatment across all asset classes. 

What are the Costliest Asset Allocation Errors?

The following is a list of some common asset allocation mistakes, along with advice on how to prevent them: 

Not Accounting for Inflation 

A portfolio that holds an excessively large proportion of assets with returns under the prevailing inflation rate, like cash, risks an effective decline in purchasing power over time. To fight inflation, try adding assets with the potential for larger returns, like stocks and real estate. 

Avoiding Portfolio Rebalancing 

Asset allocation in your portfolio might naturally shift from your initial strategy because of market movements. For example, when your stocks perform well, their value can grow to be a much larger portion of your total investments than you originally intended. This shift means that your overall investment risk goes up as more of your money is tied to the performance of those specific stocks. 

Try to rebalance your portfolio every six months or every year. Sell those assets that have increased disproportionately and purchase more undervalued assets to reach back to your desired allocation. 

Neglecting Diversification 

Investing a huge amount in a single company, single mutual fund/category, or industry can be a bad idea. Diversification helps in protecting your portfolio from large losses by spreading out your risk. 

You must represent a variety of asset types, sectors, and geographical areas in your portfolio. Diversifying your investment will help you reduce the impact that a single underperforming investment will have on your entire portfolio. 

Overlooking Your Investment Time Period 

When deciding your asset allocation, you must consider your time horizon and the duration for which you wish to invest until you need the money. Although long-term objectives may withstand greater volatility, short-term objectives call for safer and more liquid assets. 

Consider your time horizon and invest accordingly. For example, if you are planning for retirement in 20 years, you may afford a larger stock allocation. However, prioritize giving cash and bonds if you are saving for a down payment in two years. 

Copying the Crowd's Investment

Following the trends and doing what everyone else is doing will result in making bad investment choices. For example, if you invest in a trending asset class or industry that doesn't align with your financial objectives, investing heavily in it may put you in needless danger. 

Don't get influenced by the hype: instead, consider your financial strategy and make your decision accordingly. When you invest with discipline, you will likely enjoy long-term success. 

How to Build Your Strategic Asset Allocation? 

Now comes the time for implementation. Here are the steps to follow to build your strategic asset allocation:

Step 1: Identify goals

Your investment goals determine the time horizon and required returns for your portfolio: 

• Define Objectives: Are you saving for retirement, a child's education, a down payment for a house, or another major life event?
• Set Timeline: Short-term goals that are under three years need less risk, while long-term goals of more than 10 years can tolerate more volatility. 

Step 2: Check risk profile 

Your risk profile is a mix of your risk tolerance and your risk capacity. 

• Assess Tolerance: Consider how you would react to a significant market downturn. For example, you expereince a 20% drop in your portfolio value.
• Determine Capacity: A younger investor who has a stable income generally has a higher risk capacity as compared to someone close to their retirement. 

Step 3: Decide India vs foreign allocation 

You can reduce concentration risk in a single country's economy by diversifying internationally. 

• Biasness Towards Home: Several investors start with a natural "home bias" towards their local market.
• Diversifying Globally: You can capture the growth opportunities in different global economies and currencies by allocating some portion to foreign assets. 

Step 4: Choose asset classes

Select the broad categories of investments you will utilize based on your risk profile and goals. Some common asset classes include the following:

• Equities (Stocks): Higher growth potential and volatility. E.g., large-cap Indian stocks.
• Fixed Income (Bonds): Lower volatility, provides income and stability. E.g, government bonds.
• Commodities and Real Estate: May offer additional diversification benefits. E.g, real estate investment trusts. 

Step 5: Rebalance Every Year 

Rebalancing means bringing your portfolio back to your original, target asset mix. 

• Maintain Target Weights: Some assets might grow faster than others gradually, shifting your portfolio's risk level. Rebalancing involves selling assets that have grown (are now overweight) and purchasing assets that have lagged (now underweight). 
• Schedule Reviews: Rebalancing yearly is a common approach, but some investors rebalance based on specific percentage thresholds.

Final Thoughts 

For an NRI, understanding strategic asset allocation can be both exciting and challenging. It involves strategic planning and a good knowledge of both the Indian and international investment. It's vital to think about your future, plans, and timelines to build a successful investment portfolio. To achieve a balanced and diversified portfolio that aligns with your financial goals, it is crucial to manage risk effectively and stay compliant with regulations. 

Moreover, if you wish to enhance your investment strategy and minimize your tax liability, reach out to an expert at Savetaxs. We have a team of experts who can ensure you stay compliant with all the regulations so that you can invest in India with confidence. Contact us right away and get peace of mind while you invest for the future and build a diversified investment portfolio.