Gulf News - Best investment options in India for NRIs

The Indian equity market stood firm in 2022. While most developed market indices were down by more than -20 per cent, the Indian benchmark index Nifty 50 gained 4.5 per cent in local currency terms. This was despite an 11 per cent depreciation of the Indian Rupee against the US dollar.

In line with the rupee depreciation, foreign institutional investors (FIIs) sold Indian stocks worth INR 2.78 trillions. However, in what can be seen as an exceptional interest by the domestic investors, domestic institutional investors (DII) bought equities worth INR 2.76 trillions. One of the primary reasons for such domestic inflows was solid retail investor participation via the SIP route.

As per the latest statistics, retail investors account for more than 50 per cent of the daily market transactions. This direct and indirect participation by the common Indian public bodes well for the overall market depth and breadth. Despite the ongoing monthly correction in Indian equities, 2023 promises more investment opportunities for the Indian diaspora.

Equities

The Indian growth story has gained traction over the last many years. Major Asia Pacific economies, including China and Japan, are showing signs of an ageing population. India, with its growing base of prime-age population, is likely to exhibit immense growth potential.

Most large-cap Indian equities belonging to sectors like banking, consumer discretionary, and tech services have continued to outperform their developed market peers. For the US and EU, most of the gains in their equity prices have been because of expanded liquidity and pricey valuations. For India, earnings have been a significant driver of the stock price appreciation. The Indian banking sector and financial services, with its traditional higher net interest margin (NIM) over developed market peers, has typically been a FII’s hot pick.

Over the last 10-year period, SPX-500 has given a total return of 226 per cent and Nifty 50 has returned over 266 per cent. While the rupee depreciation effect is there (50 per cent depreciation of INR over the same period), it may not impact NRIs as the holding type is usually long-term.

Debt Mutual Fund

With high volatility in the US bond markets last year, the gross yield to maturity of debt mutual funds has increased to 6.75 – 7.75 per cent compared to the 2021 base of 4.5 - 5.5 per cent. With expectations of a peak in the Fed interest rate hike cycle, these funds could offer returns from 8 to 12 per cent this year. Equity-linked savings scheme (ELSS) has become one of the most favoured tax savings instruments for all, including NRIs who have some income in India.

NRE term deposits

With the latest rise in global interest rates, the interest rate currently offered by most Indian banks on these fixed deposits is between 6.10 to 7.00 per cent (depending on the tenure). This is a risk-free investment, and the current interest rates, even for one year fixed deposits, is higher than those offered by equivalent short-term US money market instruments.

National Pension Scheme

This is another low-risk, decent-return alternative to FDs. Top National Pension Scheme (NPS) providers in this space have provided a trailing 5-year and 10-year return in the 7.5 to 9 per cent range. Most of the holding assets of such schemes are in dividend-yielding securities like Indian sovereign bonds, Indian REITs, Bank’s repurchase agreement (Repo), and overnight market funds, as well as equity shares of listed companies. While lock-in restrictions exist, most products allow withdrawal by the retirement age of 60 years. Some schemes also permit exit before retirement in exceptional cases like marriage and higher education of children and for the treatment of an emergency illness. NRIs should note that once they return to India with their residency status changed, they need to close their NRI National Pension Scheme account.