Do NRIs need a Financial Plan

From our experience of interactions with nonresident investors, we have found that a significant number of investments by NRIs tend to be made during their short visits to India.

During that period, when they visit their bank or speak to relatives/ friends, they get a broad view on what is happening to various asset classes – be it real estate, stock markets, or bank deposit interest rates. Between the various social obligations, time with family, and other things to do in their action packed agenda, quick investment decisions tend to be made, a large number of which tend to be long term commitments through investments in long term insurance policies/ real estate investments. Unfortunately, a large number of these investment decisions are not necessarily aligned to long term financial goals of the NRI and his family. Once NRIs return back to their home overseas, they then tend to wonder if it was the right investment decision or whether haste made waste, especially as they now get time to think about it. They wonder whether these investments fit in case they wish to return to India at a latter point in their lives or in case they wish to use these investments for children’s education or their own retirement, or to support their family members back in India.

In addition to the alignment to financial goals for self and family, it is critical to ensure that the investment products chosen allow non residents to invest in them, the repatriation restrictions (if any) on the principal amount and the gains, as well as the taxation of the gains in both India as well as the overseas location of the NRI. A lot of these answers can only be obtained when there is clarity in terms of what role the investment is expected to play for the NRI in his portfolio.

It is therefore critical to ensure that the focus on working to a financial plan is given the same degree of importance, irrespective of whether the individual is a resident or a non resident. In fact, working to a plan tends to be even more critical for a non resident than a resident, due to a legacy holdings and finances that they may have from their days in India.

A very large number of NRIs tend to leave India during a phase of their life when they have already begun their financial life – they have probably opened regular savings bank accounts in their names, bought investment products like stocks/mutual funds/insurance products/PPF accounts, or even made a real estate investment. Since there is a tendency to leave India on an overseas assignment/project, a higher education and then decide to settle down overseas, the starting point for a financial plan is to get your existing portfolio of investments in order.

 

The following steps need to be taken to ensure that the existing finances are aligned to the needs of a non resident

1. Close all resident bank accounts or convert them to nonresident ordinary (NRO) accounts. These NRO accounts can be used to credit amounts from investments that may have been made earlier, for example, dividends from stocks, rental income, amongst others.

2. Ensure that the tax returns in India have been filed. Whilst filing a tax return is not mandatory if the income is less than the taxable limit, it is important to be sure that the total income is less than the taxable limit.

3. Review your demat accounts so that they can be converted to nonresident demat accounts.

4. Change your mutual fund portfolios (if any) to a non resident status and link your NRO bank accounts to these investments.

Once the legacy portfolio of investments have been put into order, it is crucial to begin the process of setting up your financial goals through a financial plan. Whilst a financial plan may sound rather complex, it is simply a roadmap that allows you to think about what you want to achieve with your life goals and how your finances will allow you to get there.

Let me illustrate this with an example. Let’s say one of your life goals is to have your child study at a particular post graduate program. How would you design your financial plan towards this life goal?

1. Establish the current cost of the education that you want to plan for – The costs for higher education vary significantly depending on the type of college, country of education, type of program and number of years of education. The total costs of education should be established including the costs of living and travel and not just education costs.

2. Understand the impact of inflation on current costs – Inflation rates on education may vary significantly depending on whether you wish to plan an education in India or overseas. You need to establish the corpus required for the education after adjusting for inflation.

3. Choose the appropriate asset mix to achieve your target – It is critical to establish the right balance of stocks and fixed income exposure so that you understand the returns and associated risks that you will take on the portfolio in order to reach your target.

4. Choose the appropriate product/products to achieve this targeted amount – Once the above steps have been undertaken, you can move to the product selection stage where you can look at the merits/demerits of using deposits, mutual funds, insurance plans , stocks or other options to achieve your target.

5. Evaluate the progress towards your goal at regular intervals – It is important to review the progress of your financial plan to ensure that you are on track to achieve your financial goals. However, it is important that you give your products adequate time to deliver as per their designed objectives. A review once a year should be adequate.

A financial plan can be developed for all your life goals accordingly. You may need to take the help of a financial planner to integrate all your goals into a plan so that your overall finances can be aligned to all your goals. For example, your retirement plan could vary depending on whether you wish to finally settle down in India or continue to live overseas once you retire.

In addition to each of planning for your financial goals, you need your financial plan to cover:

1. Taxation of these investments in your home country – Tax treatment of investment products in the home country may be different from those in India. For example whilst there is no long term capital gains tax on equities or equity mutual funds in India, capital gains tax may be chargeable on these investments in the country that you live in. It is therefore critical to understand the tax implications at both levels as a part of your financial plan. You may need to seek the help of a tax advisor in both India and your home country, so that there is complete clarity on the same. In addition, there may be double tax avoidance treaties in place that allow you to set off the taxes you pay at in one country against taxes due in India, so that you are not taxed twice on the same amount. Your tax advisor should be able to help you on this.

2. Succession planning – Inheritance laws tend to vary from country to country. In addition, whilst India does not currently have any estate duties and taxes, a large number of countries have an inheritance tax. Since you could end up inheriting assets from your parents/ other family members and also having your assets transferred to your family members on death, it is critical to ensure that succession planning documents like wills are created keeping the inheritance laws of both countries in mind.

Once you are clear about your financial goals, taxation and succession laws, you will be in a position to pick your investment products far more easily and can focus on tracking how your investment products are taking you closer to your financial goals.

 

This article was written by Vishal Dhawan, CFP^CM 

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Applying Steve Jobs principles to your investment portfolio

 

Post the passing of Steve Jobs in early October and the release of his biography last week, I have been thinking about how Steve’s investment portfolio would have looked and behaved if he managed it just like he managed the other parts of his life. Whilst he was known to be an extremely private person and I profess to have no idea about his personal investment strategy, I believe that a lot of his thoughts could have done wonders to an investment portfolio and to everyone who wishes to add meaning to their finances, and their life. A few of his principles that I strongly believe investors and investment portfolio should be focused on include:

 

1. Spend maximum time on the portfolio design –Steve said “ Design is a funny word. Some people think design means how it looks. If you dig deeper, you realize its how it works.” A significant amount of time tends to get spent on identifying the best product in the portfolio, looking at past performances over multiple time frames and trying to identify the best time to enter the markets. However, empirical  evidence indicates that portfolio returns are dictated most by your asset allocation strategy ie your portfolio design and only marginally by security selection and timing of entry. Thus, as an investor, a significant amount of time on your investment portfolio should be spent on the portfolio design rather than which manager/stock and when to enter?
2. Understand what you are investing in – Steve said” It takes a passionate commitment to really thoroughly understand something, chew it up, not just quickly swallow it. Most people don’t take the time to do that.” Investments can be fairly dull and filled with jargon getting thrown at you by investment advisors. Don’t be in a hurry just because you are approaching a last day for the offering to close. Only buy what you completely understand and ask as many questions as you wish to before you sign the dotted line. If you don’t understand what is being offered, stay away. If it sounds like it is too good to be true, it probably is. For example, if you are investing for tax savings purposes , don’t wait till March to complete your tax planning investments and buy the first thing available because you don’t have the time to understand it.
3. Simple can be harder than complex – Steve said ” You have to work hard to get your thinking clean to make it simple”. A large number of investors tend to believe that complex , new and innovative investment products will outperform simple investment offerings. This may not always hold true. For example, term insurance for most investors is the most efficient way to cover their lives in spite of multiple variants of insurance policies available from multiple providers.
4. Build your own life and financial plan – And last but not the least, one of my favorites from Steve.” Your time is limited. Don’t waste it living someone else’s life. Don’t be trapped by dogma – which is living with the results of other people’s thinking. Don’t let the noise of others’ opinions drown out your own inner voice.” As an investor, define your own life goals, and integrate your money and investment strategies to deliver to your own life goals. Don’t invest in something just because your neighbor or colleague is doing that. If you need help with defining your financial goals, consult a financial planner.

This article was written by Vishal Dhawan, CFP^CM 

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