Lately, I was working on projects for financial planning for NRIs and found very common problems in your Investment portfolios. and also, there were some common goals which I would like to highlight here. (Read : Who is an NRI – FEMA and Income Tax rules?)
The issues that I found in the respective portfolios clearly shows that, NRIs are among the most exploited lot of investors, and also the most missold ones after “Retirees”. The main Reasons to this are
The Time Constraints – You Visit India for very short time and in that, have very less time to focus on your money matters
No Financial Planning Approach – You do not look at your Holistic financials and work on Bits and Pieces approach, which does not let you understand the WHY part of your Investments and you end up investing in the wrong product
The Financial Advisor – Most of the NRIs are advised by their bankers, or some insurance agent which has been serving the family for quite long. So, many do not get Professional and regulated financial planning advise in India.
Most of the product selling is done to them by your bankers. Since you have to be in touch with some relationship manager for the easy banking transactions, so “Relationship managers” are aware of whatever comes in and goes out of NRI kitty and advises accordingly without understanding the financial goals and Personal financial situation of the NRI.
The Cost Factor – Even after working in Developed Countries and experiencing the fee based advisory there, most NRIs still seek FREE advice in India, and assuming the same as “Honest Advice” too. You may not be aware that how Financial advisory space has become professional and transparent, post SEBI Regulating this profession.
Though, having a good flow of income may not bother you much about all this wrong buying or selling, you should understand that life is uncertain and money will always be in limited supply. The better you use your cash flow, better you would be positioned to achieve your financial goals.
Moreover, sometimes it is not about the goals, it is just about making money grow or preserving for future. It could be about always being on the right side of law and never make any mistake which could cost NRIs dearly. The arrangement towards accumulation is different and when you plan to return India for good are different.
Even you know that having a Good financial Planning for NRIs in India is a must to help you avoid being into a Financial mess, still you delay it till it becomes unmanageable for you.
Common Mistakes in Investment Portfolios of NRIs
Below is the list of some of the common things that I have found in the Investment portfolio of NRIs. I am calling them mistakes as i have never found those products fit in as per the Financial Planning for NRIs in India.
- ULIPs / Pension Plan
Every second NRI I met are found to have one or two ULIPs (Unit Linked Insurance Plan) or Pension plan (Unit Linked or Endowment) in their portfolios and that too with quite a high premium.
These plans are sold to them by their bankers in the name of Retirement planning. But as I always say Retirement planning and pension plan are two different things though interrelated (Read: Retirement plan or pension Plan), such a high premium sometimes leaves less scope for them to invest further in other investment options. (Also Read: Best Investment options for NRIs in India)
Trust in the Bank, Relationship with the Bankers, and No time to understand on your financial requirements and spending time to know more about the product cost NRIs dearly.
Pension plans are easy to sell as compared to ULIPs as it does not need any Insurance medical tests to issue the Policy. (Read: NPS for NRIs – How to Invest?)
ULIPs were sold with a USP of Tax-Free Return which also is no longer available from FY 2021-22, above Rs 2.50 lakh of annual premium. (Read: new rules ULIP Taxation after Budget 2021-22) - Resident Saving Bank Account
As per RBI FEMA guidelines, NRIs are not allowed to keep Resident saving Bank account in thier name. However, Many are still continuing with the one they used to have.
NRIs have to convert the Resident savings account to NRO (Non Resident Ordinary) account.
Also, when NRIs have returned India for good, they need to convert back their NRO account to Resident savings account, and close their NRE account, which they used to send money from abroad and keep the amount easily repatriable.
Since Many are reluctant to close NRI Fixed deposits since it gives them tax free interest income, but law does not permit them to continue with such account once they become Resident or RNOR (Read: What is RNOR Status in Income tax?)
(Also Read: Taxation of NRE Fixed deposits for Returning NRIs) - Non Updating of Tax and Residency Status in Investment Products
This is Important, but many time was missed. The reason of having missed such an important aspect is that the purpose always remain to invest more, but hardly to manage what has already been done.
If you have Mutual funds, you need to update your KYC in India, and then update all the Mutual funds houses separately about the change in status and updation of the bank account details.
Also, if you have Insurance policies, you need to inform the insurance companies, about your residency status as then onwards you will be paying the future premiums through Non Resident account and you will want the Surrender/Maturity or Money back proceeds in the new/changed account
Your Demat account need to be closed as now you have to open a PINS account with the DP. Your holding will be transferred to that account. (Read: 10 Important things to do before becoming an NRI)
These small issued need to be managed timely to avoid questions from any tax or legal authority - Investing should depend on your Spending need
NRIs are told to Invest in India by many different sales pitches. But whether to invest in India or the country of residence only depend upon where the money ultimately is going to be used. Always Invest where the goal is. (Read: Mutual funds for NRIs – a Complete Guide)
The Major risk in investing in different country is the currency risk. If the money to be utilized in Dollars and when NRIs can easily invest and get money back in dollars then why to take currency risk by sending money back home to invest.
So when we do financial planning for NRIs in India, it is important to decide which goal is of which country, so the proper allocation can be done. - Collecting Real Estate
I have used the word “Collecting” not “Investing” is because when you invest in many properties without any goal based or financial planning approach, without a clear direction and reasons behind those investment, then it is as good as collecting.
Investments should be made after deciding the end use, with rationale justification. Also the management of the same should be clear to the investor, as in how this investment will be helpful and managed by Family in case of investor’s absence.
After ULIPs, Real estate is the second most prominent investments found in NRIs investment portfolio
As explained in point above, If property is going to be used by you in future, if some one is in India to take care and manage the property well, then only it make sense to invest in Real estate. Else Equity Investment always be helpful in growth. (Read: Why Real estate has higher risk than Equity?)
Financial Planning for NRIs in India – How it is Different?
Is it really different? You must be wondering. As far as the structure of the financial planning process is concerned it is the same for every person. However, what is different is the Person and Profile. So here, process is common but that needs to be tweaked and designed to suit the needs of NRI.
You are different in Tax rules, Bank accounts, there are some investment restrictions on you, you have many non suitable products, your goals can be multidimensional and multi-country, Currency fluctuations, TDS rules, Transaction related issues.
That’s Why Financial Planning for NRIs in India needs special attention and has to be done carefully. (Also Read: NRI Retiring in India- Important points to consider)
Remember this is your hard-earned money, which needs to be well invested so can be well spent on your future. Even your present needs to be managed well. Whatever has happened in the past can be corrected only if you take initiative.
Manikaran Singal is the founder and Chief financial planner at Good Moneying Financial Solutions. He is a CERTIFIED FINANCIAL PLANNER CM and SEBI registered Investment adviser (Regd no. INA 100001620). He’s having 20+ years of experience in financial services space.
Hi Manikaran
Kudos for an excellent post. This holds a lot of valuable lesions and the fundamental understanding that Financial planning for NRIs is equally important as for Indian resident. With the examples that you gave, its actually sad that a particular section of society is targeted and mis-sold products as they are vulnerable, being flush with funds and low on understanding of financial planning. NRIs need to be appraised of the fact that investments have to be made with a plan and not just randomly, and proper advice is necessary before buying products.
Thanks Abhinav. It is a fact that NRIs are among the most missold lot these days. be it Real estate, equities, bank Fds…they invest where they are advised to by bankers. and bankers advise them where there targets are tilted to…so it becomes inevitable for NRIs to go in a structured way and give reason to each and every investment.
what is your suggestion for NRI? can you throw some light on this subject??
Krishnan, the whole idea of this article is to make NRIs sensitive towards the financial planning aspect. They have good inflow of money mainly due to currency difference and on there short visit of india they get missold with some unwanted products not suitable to there requirements. Like they get sold with pension plans as it doesn;t require any medicla tests which are not possible in this short visit, they don’t get advise on adequate life/health/accident insurance coverage, they don’t work towards the goals, there taxation aspects are ver different which needs to carefully seen before advising any investment product etc. and many more such reasons.
Having money is of no use if people doesn’t know how to manage it properly.
Thanks Sir but what about tax aspects which could be very material & generally ignored just as not covered in your article too – relevant especially for US Europe & other such countries…..Would appreciate comments rejoinder & maybe a full fledged article too!!
Rakesh, this article is just to create awareness among NRIs to not to get missold with the term financial planning. If Someone is genuinely following this approach Tax aspects auto matically gets taken care of.