NRI finance planning: Expert Take: Asset allocation can help NRIs avoid the heartburn

April 20, 2021
Non- residents live and work under very different conditions from what is available locally in their country of origin. Sometimes they may be good, and sometimes conditions need not necessarily be that comfortable. Whatever it is, most of the non-residents intend to return to their country of origin as they finish the most active working life, as they plan to settle down with whatever they have saved over the years. Further, employment conditions may not be as secure as it ought to be in all places and therefore, sudden job losses may happen in some countries and businesses. There are many such instances in the last couple of years when people lost their jobs as the sectors they were working in started shrinking with declining business, or as events like the pandemic, led to the closure of many businesses in many countries. Therefore, the uncertainties maybe sometimes overwhelming. As you return to the homeland you need Rupees, whereas for your children’s education you may need Euros or Dollars. So, there is a need to provide for different objectives and goals in different currencies too. All this takes us to the need for careful planning of finances.

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Planning helps one to align investments to risk profile, and to allocate the available funds in a prudent and effective way into different asset classes to realize the different goals. A risk profile is nothing but an indicator of your awareness of the financial markets, your capacity to invest and your nature and temperament or psychological disposition as an investor. All sophisticated wealth managers make use of risk profiler to understand their customers before they make recommendations on investments. Risk profiling will give more or less accurate information on whether one is a conservative, moderate or an aggressive investor. From this evaluation of the risk profile comes what is called asset allocation, or where exactly the money should go, or the investments should be made.

It is important that the investment portfolio should be a stable one with a certain amount of predictability about the risk, returns and other outcomes. To achieve this, one should look at what is called traditional asset classes or primary asset classes. These are fixed income or debt instruments and equities. When you allocate funds the basic asset classes take up a major share of the allocation. While equities may give you growth through higher returns over the long run, fixed income provides you with relatively lower but stable returns. Fixed income provides stability to the portfolio. Beyond the traditional assets are what we call alternate assets. These include asset classes like gold, real estate etc. Gold provides some amount of hedge against inflation and it is worthwhile keeping in the portfolio but to an extent of 5 % of the portfolio because it will not give you any regular cash flows or income but over longer time periods you will get some amount of appreciation.

It may not be advisable to take exposure to all asset classes and sub-asset classes for the portfolio. In other words, making investments in a large number of instruments should be avoided, and one must take exposure to two or three asset classes and sub-asset classes. The wider you spread your exposure to multiple asset classes the higher will be the risk that you carry on the portfolio. In other words, the vulnerability of your portfolio to negative events increases if you are exposed to a number of investments and instruments. One of the principles followed while selecting a combination of asset classes is to choose two or three of them which have a low positive correlation in terms of returns and performance. Again, good financial advisors will almost always tell you about the selection process that they follow while recommending particular products and rejecting others. The selection methodology and the adherence to the process would ensure that the basket contains only good apples.

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Some goals like children’s education would require investments in dollar or euro-denominated assets. This will ensure that you earn in the currency in which you are most likely to spend. This would eliminate currency risk from the picture to a great extent. As you may be aware education from reputed universities is expensive, and one needs to plan carefully from an early stage to realize this goal. It may be true that the costs could rise over time. There are a number of products that invest in the US, Europe, Developed Markets, Emerging Markets etc. in addition to various themes and sectoral ideas. There are a number of good products available from the mutual funds space. And, finally, as part of the normal investment activity and finally for retirement planning too, there is a need to look at Rupee assets. India is one of the fastest-growing economies in the world, and its demographic positioning, the large consumer base are factors that will help the country emerge as one of the largest economies and this will get reflected in the equity market too. The coming decades will be decades of faster growth in India, and selective investing in equities alone will help one reap the returns it promises. Therefore, well-studied asset allocation can bring in optimum results.