by Moiz Mannan
At a time when the Indian rupee is still cheap but its freefall appears to have been largely arrested, it is a good idea for non-resident Indians to re-organise their investment portfolios with the inclusion of mutual funds.
Over the past few months, the Reserve Bank of India (RBI) as well as the Finance Ministry has been seized of the problem of controlling the rupee slide. Over this period several measures were put in place including making it easier and more lucrative for foreign investors and NRIs to put their money in India. We saw several restrictions being removed and opportunities of higher earnings being offered, particularly in bank deposits.
Undoubtedly, NRIs took advantage of these offerings and many of them have invested likewise. However, owing to their higher earnings abroad, many NRIs still have income that they could put aside in a tad more risky ventures that offer returns higher than the bank deposit rates.
In view of this, NRIs who are looking for higher returns may use the exchange rate advantage to invest in equities through the Mutual Fund route. This is because Mutual Funds, particularly if approached though Systematic Investment Plans (SIPs) offer a wide range of options to choose from. Regardless of market movements, most diversified MF products have consistently offer returns in the range of 13-14 per cent over the last 10 years. NRIs may invest in any of the India-focused offshore mutual funds or ETFs operating in their host country. These India-dedicated mutual fund schemes invest in a diversified basket of Indian companies, usually with the help of research inputs from their Indian subsidiaries or other Indian fund houses. Several Indian fund houses also market their offshore funds abroad.
The advantage of investing through these offshore funds is that NRIs can invest in foreign currency, but there are heaby entry loads involved. Overseas Indians may also invest in mutual funds domiciled within India, using their NRE or NRO account. These funds do not charge any entry load, but the investment is in rupees. Here there was the danger of losing money owing to decline in the value of the Indian currency, but by and large the steep fall now seems to have been arrested.
NRIs with a slightly higher risk appetite can invest in a mix of large-cap, mid-and-small cap oriented equity funds, while others can distribute money between equity and debt funds.
SIP is a smart financial planning tool that helps create wealth, by investing small sums of money every month, over a period of time. Investing at an early stage offers the benefits of two powerful strategies, rupee cost averaging and the power of compounding.
The biggest advantage of SIP is that one need not time the market. In timing the market, one can miss the larger rally and may stay out while markets were doing well or may enter at a wrong time when either valuation have peaked or markets are on the verge of declining.
Rather than timing the market, investing every month will ensure that one is invested at the high and the low, and make the best out of an opportunity that could be tough to predict in advance. SIPs thus make the volatility in the market work in favour of an investor and help in averaging out the cost called “Rupee Cost Averaging”. For example, with Rs1,000 one can buy 50 units at Rs20 per unit or 100 units at Rs10 per unit depending upon whether the market is up or down. Thus, more units are purchased when a schemes’ NAV is low and fewer units when the NAV is high. Hence, when the two cases are taken together, cost is averaged out. The longer the time-frame, the larger are the benefits of averaging.
SIPs also help in availing benefits of compounding. This means the earlier one starts an SIP and longer the investment horizon, the larger the benefits. The reason being, each rupee one invests earns a return, which ends up as more rupees to earn a return, allowing investment to grow at a fast pace. Higher rates of return or longer investment time periods increase the principal amount in geometric proportions. This is the single most important reason for investors to start investing early and keep on investing on a regular basis to achieve the long-term financial goals.
The Peninsula
