Financial Planning for NRIs

financial planning for NRI's
Lately, I was doing financial planning for some NRIs and found very common problems in the portfolio and also some common goals which I would like to highlight here.
The issues that I found in the respective portfolios clearly say that this category is the most exploited lot of investors and the most missold ones after “Retirees”.
Though they have a good flow of income which doesn’t let them bother much about all this, they have to understand that much of this good flow is due to the currency difference and if you have some important goal to achieve in life then going forward you might find yourself into a financial mess
Most of the product selling is done to them by their bankers. Since they have to be in touch with some relationship manager for the easy flow of money in their bank accounts, so “Relationship managers” are aware of whatever comes in and goes out of NRI kitty and he advises accordingly without understanding the financial goals and Personal financial situation of the NRI.
Some of the common mistakes in their portfolio are as under:

1.       Pension Plans

Almost all the NRIs in my association are found to have pension plan in their portfolios and that too with a good amount of premium. These plans are sold to them by their bankers in the name of Retirement planning. But as I always say that Retirement planning and pension plan are two different things though interrelated (read: Retirement plan or pension Plan). Going deeper into the transaction I found that this plan was sold when they were on very short visit and thus could not available for the medical tests. Now had their stay in India a bit long they would also have sold with some other ULIP insurance policies.

2.       Zero Insurance

They have never been advised to take good insurance coverage. This is not right to assume that NRIs have good income flow and thus are able to manage the uncertainties very well. Though they were sold with many ULIPs or endowment plans but no one bothers to guide NRIs the importance of Risk management and proper insurance planning. However, this becomes the most important factor in financial planning of NRIs, if they have plans to come back for good after some years. (Also read: Review the insurance portfolio)

3.       Lump sum Investments

Whatever be the economic and investment scenario, NRIs get advice on Lump sum investments and never get any advice on SIPs. They are told that when they have good flow of income then why to go for monthly investments, as monthly savings is only meant for those who can’t afford to go for lump sum. One has to understand that Systematic Investment Plan or as it is popularly called as SIP is advised to average out the market fluctuations and which does not depend on the capacity or affordability of investors. This is just the commission that bankers earn varies in SIP and lump sum investments.

 4.       No understanding of Risk

Every NRI were told about the growth story of India, strong consumption economy, regulatory environment but never about the risks associated. The most important risk to understand is the currency risk. For e.g. these days INR/USD is around Rs 65/- , and it becomes very attractive proposition for NRIs to send more money to India as NRE deposits are also offering attractive rates.

But if the goal is to repatriate the money after few years then it may be very risky for them to send money to India. As even after getting safe 8% return on NRE deposits if at the time to repatriation the INR/USD is 45/- then what’s the point of sending money now. Risks have to be understood in commensuration with the goals and investment product selected.

 5.       Investments without goal / under obligation

NRIs are in a habit of making investments whenever they visit India and that too without a particular financial plan. With the accumulated lump sum amount lying in the account they fall easy prey to mis- sellers and also to own mental blocks.

They will make investments as Relation manager says as he’s served him in banking transactions as and when he need , they will purchase property as their relatives says that this is the only appreciating investment in India , they will open some more a/c in different banks as their relative has joined that bank and have to help him achieve his target , they will buy new car every second time they visit India etc. all this and many more financial mistakes they do when they come with surplus amounts in hand.

Why I am saying these as mistakes because they were done without any consideration for long and short-term goals. One has to be sure of the effect your decision to purchase a car and that too for your short stay of 45 days will make on your other goals. You have to have a Financial Plan in Place so you can have a holistic view of your finances to make financial decisions with confidence.

Financial planning for NRIs is equally important as for Indian resident. There’s not much difference between them as both have their goals which need to be achieved with the cash flow they have. But in the case of NRIs extra precaution to be taken in the form of understanding the currency fluctuation, taxation and income/expenses pattern in the country of residence and where they want to enjoy that goal. Financial Planning for NRIs becomes more important when they have plans to come back to India in the near term or after retirement.

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6 COMMENTS

  1. 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.

    • 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.

  2. 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.

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