Invest like a pro: Our expert breaks down the best long-term options for NRIs

NRIs looking to invest in their home country are often confused by the wide array of choices. The faulty and unsound advice coming to them from relationship managers at banks only adds to this confusion. They often end up pouring their hard earned money into investments that suit distributors more than they help the investors.

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As a rule, any investing decision should take into account the needs and goals of the investor. The investment should fit into the overall financial plan of the individual. Long-term investing offers several advantages, and even small amounts invested regularly can potentially grow into a decent corpus over time. Let us examine the long-term investment options before NRIs.

Stock investments: For NRIs planning to invest for long-term goals that are more than 7-8 years away, stocks present an ideal wealth creation opportunity. A well chosen stock can generate outsized returns over the long term. Companies like Reliance Industries or HDFC Bank or TCS will continue to deliver on growth and profitability for years. But tread very carefully because though individual stocks have the potential to churn out spectacular gains, they can be risky in the short term. Even bluechip scrips can tumble or face a rough patch for extended periods. Go for this option only if you have access to a financial advisor or can analyse stocks yourself and have the stomach for volatility.

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Equity mutual funds: Mutual funds spread out the risk in equities by investing in a basket of stocks. All mutual fund houses allow NRIs to invest in their schemes but investors based in the US and Canada have to go through more paperwork due to the provisions of the Foreign Account Tax Compliance Act (FATCA).

The best option for long-term investors are flexi-cap funds that invest across market segments and capitalisations. Since mutual funds in India don’t accept investment in foreign currency, you need to have an Non-Resident External (NRE) or Non-Resident Ordinary (NRO) or a Foreign Currency Non-Resident (FCNR) account in a bank. An NRE account suits those who wish to repatriate the earnings from India back to their place of residence. Money in NRO accounts cannot be repatriated.

ULIPs: The gains from equity funds and equity oriented hybrid funds are no longer tax free. Short-term capital gains (held for less than 1 year) from equity and equity-oriented hybrid funds are taxed at 15% while long-term capital gains (more than 1 year) beyond Rs 1 lakh are taxed at 10%. But unit-linked insurance plans enjoy tax exemption if the premium is below Rs 2.5 lakh a year.

ULIPs also allow investors to switch from debt to equity and vice versa without any tax implication. Even the debt fund options are tax free. In case of non-equity mutual funds, short-term capital gains (held for less than 3 years) are added to income and taxed at slab rate while long-term capital gains (more than 3 years) are taxed at 20% after indexation.

NPS: NRIs can also invest in the National Pension System, which allow investors to fix their asset mix as per their own risk appetite. They can also opt for the auto choice where the asset allocation is determined by the age of the investor and is rejigged every year. One can open an eNPS account if one has a PAN card or an Aadhaar card and use an NRO or NRE bank account to invest in the scheme. However, NPS investments are locked in till you turn 60. Also, if the NPS corpus is Rs 5 lakh or more at the time of maturity, only 60% of the accumulated corpus can be withdrawn and the remaining 40% will be put in an annuity to earn a taxable monthly pension. Premature withdrawals before 60 are allowed but only 20% can be withdrawn and the remaining 80% of the corpus will be annuitised. This compulsory anuitisation of the corpus make NPS rather unattractive for NRIs.

Fixed income options: NRIs do not have many fixed income options before them, except for bank deposits. They cannot invest in Post Office schemes, though PPF accounts opened before they became NRIs can be continued till maturity. NRIs can invest in fixed deposits through their FCNR (Foreign-Currency Non-Resident Account) in any foreign currency. The interest earned is tax-free and foreign exchange fluctuations have no impact on the deposits in the FCNR account. Fixed deposits can be opened in Indian currency through the NRO or NRE accounts. However, the interest rates are down to 5-6% right now, making bank deposits an unattractive option for the long term.