Aryan Suris best bet is his homeland

Publication: DNA Mumbai;   Date: October 23, 2006;    Section: Personal Finance;   Page: 24

NRIs can earn more from their portfolios by turning to India

During my last visit to US, I met up with several NRIs including high networth individuals, senior level executives with consulting firms, software engineers and the likes. One thing that was common within this segment was a complete lack of trust in investing in India.
Never mind the destruction the Enrons, Worldcoms or Andersens of the world have wreaked on their portfolios, the comfort level was still very high with US-centric investments. Whether it is ignorance, procrastination or sheer lack of trust, a lot of NRIs were damaging their long-term economic interests by taking emotional decisions.
One such gentleman I met was Aryan Suri, a middle aged corporate execute living in an upscale New Jersey locality. “I have been dealing with an XYZ financial advisors and I have done my financial planning,” he said.
When I saw his current scenario, I figured out how things all over the world were similar with respect to what kind of financial products are sold first. He has several investment-oriented insurance plans and something called variable annuity where the costs would even put an Indian insurance plan to shame.
Suris financial goals:
Corpus of $200,000 for daughters college education in 2018
Retirement income of $7,000 per month starting 2024
Corpus for a holiday home in Florida by 2015
Earn a return of around 8% on portfolio.
I took a look at his cash flow and networth statements, investments, annuities and insurance plans. An assessment revealed the following:
1. Though he had a high level of income, lifestyle expenses were on the higher side and along with mortgage payments and taxes accounted for almost 65% of his gross income.
2. He had purchased direct shares and mutual funds through his 401K portfolio. Almost all of the funds were through Fidelity. This is because Fidelity was the plan administrator for his organisation and he had a limited choice of fund houses. I asked him why he chose Fidelity Contra. Like most investors, he had chosen it because his friends had earned good returns on this and thought it would be a good choice.
3. His bond fund investments were with the same fund house and were just there to strike a balance. There was no clarity on why debt should be added to the portfolio and no focus on maximising the post-tax returns.
4. He had around $50,000 in his savings account that was earning him 3% pre-tax.
5. One of the most aggressive small cap funds had returned 14% in 2 years and 6% in the last 5 years. Compare this with HDFC Prudence Fund, a balanced fund investing 60% in equities and 40% in debt (May 2006) returning around 48% in 2 years and 40% in 5 years.
Another large-cap fund, Fidelity Magellan, which Suri had invested substantially in, had returned just around 2% last year.
6. Most of his bond funds were returning 1-2%. I wondered why someone would park most of his money in bonds earning a paltry 1-2% when there were a plethora of options to earn around 8% at virtually no risk.
7. Some of his investment-oriented insurance plans and the ridiculous variable annuity had costs of around 80% in the first year. And like insurance buyers everywhere, he was unaware of this and had just focused on the fancy illustrations shown to him.
When I shared the facts with him on the kind of opportunities available in India and told him that that even an investment in PPF which his father had started for him and who still continues to invest Rs 70,000 per year in it had returned 8% post-tax at virtually no risk, he was stunned.
India, with some of the best investment opportunities in the debt, equity and real estate space, and a benign taxation regime is an interesting investment destination for NRIs.
For those who are comfortable with market risks (which most NRIs are, having placed the majority of their retirement corpus and childrens education corpus in mutual funds through the 401K, 403b and 529 plans). India is a tax haven where irrespective of the size of your portfolio , you pay no tax and the take-home is completely yours to keep.
After a detailed review of his current situation and analysis, we decided to follow an India-centric strategy involving the following:
1. Open an NRE account where he could transfer money every month. Some of this money would come from his accumulated cash reserves.
2. Utilise instruments like PPF, RBI bonds and senior citizens scheme for the debt component. Though these investments cannot be made directly by NRIs, doing so through parents remains possible through proper gifting processes.
3. Create a cashflow management strategy to ensure that surplus funds were invested in appropriate investments according to the plan and not on an ad hoc basis.
4. Start off with systematic investment plans in around 4 diversified equity mutual funds and a balanced fund.
5. Take exposure to a couple of fixed maturity plans of varying time horizons to address the goal of buying a retirement house for his parents.
6. Make several investments in his parents names as they earned very little income and hence interest income earned was virtually tax-free.
7. Keep cash reserves of around 20% in cash from his parents contingency planning perspective and take advantage of further volatility if any.
NRIs would do well to allocate a certain portion of their investments to India, which is in a phase where the US was several years or decades ago. This is a time of the greatest economic prosperity in Indian history.
Favorable demographics, investments in infrastructure outsourcing, consumption, innovation, and relative political stability will continue to enhance the standard of living throughout India.
This should keep the economy moving and profits growing, which will eventually be reflected in higher stock prices. It sure helps to be in the right place at the right time.

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