It is imperative to create a personal finance plan that aligns your requirements, return expectations, and financial needs with your risk appetite. A well-devised plan that considers all of the above is necessary to choose an NRI investment option that ensures you remain financially secure. It can also provide you with enough savings to create a safety net in case of emergencies and ample funds for your long-term goals or even retirement.
Here we have created a list of the eight most popular and safe and best investment options available in India for NRIs (non-residents of India)-
1. Bank Fixed Deposits – Investing in bank fixed deposits is one of the safest and most popular investment options. It helps to diversify your portfolio and increase your savings. If you are a risk-averse NRI, this is an ideal option as bank fixed deposits ensure guaranteed returns that are not affected by market fluctuations. You can invest in bank fixed deposits with your NRE or NRO account and earn a high fixed rate of return. Check best NRI FD rates here
. There are three types of fixed deposit accounts –
- NRE Fixed Deposit Account – This is one of the most common options to choose from and allows you to convert your foreign earnings into Indian currency, deposit them as savings and earn interest on them. The interest rates offered by the various banks vary between 5-7.50% with North Loop offering the industry-highest rate of 7.5%. You can open this account jointly with other NRIs as well, and both the principal and interest earned here is tax-free and can get repatriated. Also, NRE FDs get covered under DICGC insurance (Deposit Insurance and Credit Guarantee Corporation).
- NRO Fixed Deposit Account – If you receive rent, dividend, pension funds or interest payments in India and want to invest that money to grow your savings, you can choose to open the NRO FD account. These accounts can be jointly held with another resident Indian as long as they fulfill the criteria of being a relative (as per Section 6 of the Companies Act, 1956). Unlike NRE FDs, income tax applies to the interest earned on the principal amount in the NRO account. The rates offered here are often the same as domestic deposits, and the interest earned is taxable at a rate of 30%.
- Foreign Currency Non-Resident (FCNR) Fixed Deposit Account – If you want to protect yourself against currency fluctuations and forex rate risks, FCNR accounts are a good option. You can hold your deposit in various currencies in this account and also repatriate both the principal and interest amount fully without any restrictions. It can be opened jointly with other NRIs as well, and you can also avail overdraft facility on your NRO savings/ current account against your FCNR FD account. Moreover, you can enjoy tax-exemption in India on the entire deposit and interest amount in your FCNR FD account.
2. Direct Equity – If you are an Indian staying overseas and want to take advantage of the growth and economic prospects in your country, you can do so with the help of direct equity investment that is, investing in the Indian stock markets. Direct equity in India can be a great way to diversify your portfolio, and you can do easily under the portfolio investment scheme (PIS) of the Reserve Bank of India (RBI). Under this scheme, you must open an NRE/NRO account
with an Indian bank that is authorized by the RBI because your aggregate investment cannot exceed 10% of the paid-up capital in an Indian company and the PIS account helps RBI ensure that this limit is maintained.
Moreover, you need to open a trading account with a registered broker and a Demat account that holds your shares in an electronic form to trade in stocks on the National Stock Exchange (NSE) of India.
If you are an NRI, the main difference between investing in stocks for you and resident Indians is the tax liability as you are liable to TDS (Tax Deducted at Source) while they are not.
3. Real Estate – Real estate in India is an ever-growing industry and holds significant prospects in sectors like hospitality, commercial, housing, manufacturing, and retail. They are also moderately-liquid investments and are quite popular because the risk involved is low while the return received is very high as real estate property prices keep increasing.
There are several ways you can opt for a real estate investment, some of which are – commercial properties, residential properties, and Real Estate Mutual Funds. Investments in commercial spaces such as offices or shops can help you generate considerably high returns but make sure that you research the properties thoroughly and do not make decisions in a hurry.
You can even use the services of a real estate broker who can get all the work done and manage everything seamlessly for you.
An important thing to note is here that if you are an NRI, you are only allowed to invest in residential or commercial real estate properties, and not agricultural land.TDS on sale of property by NRI – Know your taxes
4. Bonds and Non-Convertible Debentures (NCD) – If you want to diversify your portfolio beyond bank deposits and explore opportunities in the financial market you can do that through bonds and debentures.
A bond is a unit of corporate debt issued by a company and is referred to as a fixed-income instrument as it pays a fixed interest rate to debt-holders. Bond prices are inversely correlated with interest rates and have specific maturity dates for repayment of the principal amount.
There are three main categories of bond that you can invest in –
- Non-Convertible Debentures (NCD) - An NCD is a fixed deposit used by public companies in India to raise funds without diluting their equity. They give a fixed rate of interest for a specific period, and the debentures offered by these companies cannot get converted into shares. These are a good option if you are looking for secure long term options beyond stock and mutual funds and want to diversify your portfolio with low risk and ample liquidity investments. Also, the NCD market is well regulated, the investment process is exclusively online, and the allotted NCDs get credited to your Demat account.
- PSU Bonds – Public Sector Undertaking Bonds (PSUs) are medium or long term debt instruments issued by public sector undertakings. PSU’s require funds for their regular working capital or capital expenditure and to meet these requirements they issue PSU bonds. All PSU bonds have a specific maturity date and have a built-in redemption. If you have an average risk appetite and are looking for double-digit returns, this is a good investment option for you. The market for PSU bonds has grown substantially over the past few years, and many high net worth investors are now opting for PSU bonds.
- Perpetual Bonds – These are bonds that do not have a maturity date and are not redeemable. However, they pay a steady stream of interest and have a perpetual bond cash flow. You can trade these bonds in the open market and to make a profit using these bonds, market conditions and your willingness to sell them play an important role.
5. Government Securities – The Reserve Bank of India has recently allowed non-residents to invest in specified Government of India dated securities without any quantitative limit. This option came into effect from 1st April 2020 and got introduced under a separate channel called ‘Fully Accessible Route’ (FAR).
As an NRI, you get permitted to invest in Government securities under the debt regulations which makes you eligible to invest under the FAR as well. Some types of dated government securities you can opt for long-term investment strategies include –
- Fixed-rate government bonds – The interest rate on these bonds are fixed.
- Floating rate government bonds – The interest rate here changes according to market fluctuations.
- Capital Index Bonds (CPI bonds) – These bonds have coupon payment rates that are adjusted based on the current inflation rates in the Indian market.
6. Certificate of Deposits (CDs) – A Certificate of Deposit is a type of money market instrument issued against the funds deposited by you with a bank in a Demat form for a specific tenure. Even as an NRI, you can subscribe to Indian CDs, however, only on a non-repatriation basis. That means you cannot endorse it to another NRI in the secondary market. CDs get regulated by the Reserve Bank of India and usually used as short-term investments.
7. National Pension Scheme (NPS) – If you want to plan for your retirement and are looking for a long-term investment with equity exposure in your portfolio as well as pension benefits, NPS is a good option for you. In NPS, you get various choices like equity investment, government securities, and other fixed-income instruments. But you can invest in NPS only if you are an Indian citizen. Also, when investing in NPS, the savings get locked in, and you get a lump sum amount only after retiring while the rest gets used for a pension. Therefore, you should opt for NPS after careful consideration based on your long-term retirement plans and financial goals.
There are two types of NPS accounts –
- Tier 1 Account – All payments and funds are locked in this account until retirement. If you retire before the age of 6o years, you receive 20% of your investment. The rest of it gets invested into an annuity. If it is after the age of 60 years, you are allowed to take 40% of the investment as cash and the rest must get invested.
- Tier 2 Account – These accounts offer more flexibility concerning deposit and withdrawal of funds but can get opened only if you already are a Tier 1 account holder. Tier 2 accounts allow you to decide your own portfolio structure and that can be achieved by using a diversified investment strategy.
8. ULIP - Unit Linked Insurance Plans (ULIPs) are offered by insurance companies and give you both insurance and investment options under a single integrated plan. If you are looking for secure returns and also have long-term financial plans, you can opt to invest in ULIPs investing plans. When investing in this option, you have to pay a premium either on a monthly or annual basis. A part of it gets used for providing insurance cover, and the rest of the amount gets invested in the fund chosen by you like equity, debt, or hybrid.
Is it worth investing in ULIPs?ULIP or Mutual funds?
Know the differences and what to go for.
9. Gold - Investments in gold can be done in various formats such as gold bars, gold ETFs, gold mutual funds, gold deposit schemes, and others. If you are willing to invest in gold and are a conservative investor with a low-risk appetite, you can opt for gold ETFs or Gold Exchange Traded Funds. These instruments function as a mix of both stock and gold investments and get traded on the National Stock Exchange (NSE). Gold ETFs are completely transparent in terms of pricing and can be bought and sold like any other company stock.
10.ETFs - ETFs or Exchange Traded Funds are marketable securities that track stock elements and mirror an underlying index. As an NRI, you can invest in ETFs with minimum portfolio management and a low transaction fee structure to gain exposure to a myriad of Indian equities or debt. ETFs are a cost-effective way for you to quickly invest in the Indian stock market as you get access to a portfolio of Indian stocks that mirror indexes such as the Nifty 50. ETFs can help you diversify across sectors and companies in an easier manner as compared to direct investment in individual Indian companies. Moreover, given how ETFs are highly liquid investments, they have become one of the most popular ways of investment in India for NRIs.
There are three types of mutual funds –
- Debt Funds – These funds invest only in fixed income instruments and are a reasonable choice if you want to move out of the realm of bank deposits and bonds while still avoiding high risk like in direct equity investments. If you sell your mutual fund investment within three years, it will be taxable as per the Income-tax slab rate applicable to you. However, if you sell it after three years, it will be taxed at 20% with indexation benefits.
- Equity Funds - These funds invest only primarily in equity instruments with more than 65% of the fund containing stocks (equity). If you invest in equity mutual funds and sell them in less than one year, the fund returns are treated as Short Term Capital Gains (STCG) and get subjected to STCG tax at 15% (plus 4% cess). If you redeem them after one year, they get considered as Long Term Capital Gains (LTCG), and your gains over Rs.1 lakh get taxed at 10% (plus 4% cess), without any indexation benefit.
- Hybrid Funds - These are funds that divide investments between equity and debt to create a balance. If you want to mitigate risks by creating a balanced portfolio, hybrid mutual funds are a popular investment choice. These funds distribute your investment corpus across different asset classes in a well-planned manner to minimize risk and generate capital appreciation. For long-term income generation, hybrid funds invest in equity stock of companies while for short-term gains, it focuses on debt instruments and government bonds.
Here are 8 major differences of investing in mutual funds & fixed deposits.