5 Mistakes NRIs Make When Managing their Finances

 

We all make mistakes. However, when it comes to personal finance, we see friends and family make the same mistakes repeatedly. From failing to make a holistic plan to relying on word of mouth to ignoring the fine print, these mistakes can cost you more than a good night’s sleep – you may actually be losing money. Below we discuss some common personal finance mistakes NRIs make and what they should be doing to manage and protect their wealth.

Mistake #1: Investing without a Plan

Though NRIs, in general, are inclined to save, the biggest mistake we see NRIs make is not having a holistic financial plan on how to invest the savings. They may be saving for retirement through a company 401(k), putting aside funds for their child’s future educational needs, and own their own home. Although they are taking the right steps to grow their assets, they may not be considering how their investments work together. As a result, when they examine their overall portfolio, NRIs may be too heavily weighted in one geography or asset class, have their funds tied up in too many illiquid investments or even miss opportunities to make better returns.

The first step to recover from this mistake is to set a financial plan. Start by estimating future funding needs and financial goals. Consider questions such as: When do you plan to retire? How much do you need for retirement? Do you plan to return to India, and by when? How much do you need to fund future college expenses? Once you answer those questions, you will have a solid understanding of how much you need to save, and when you will require those funds. From there, you can make a few assumptions on interest and earnings and calculate what you need to invest annually to hit your target and generate enough to meet your future funding needs. This is where taking the help of a financial advisor could prove very beneficial.

Mistake #2: Relying on Friends and Family for Investment Advice

You may not be surprised to hear NRIs, and Indians in general, rely heavily on word of mouth recommendations when making decisions. Surprisingly, though, this influence extends well beyond restaurant, shopping, or travel advice. According to this 2014 study by BCG, the average Indian consumer is three times more likely to recommend a bank than those from countries like the US, UK, Germany, or Spain. So when an NRI hears about a once in a lifetime investment opportunity from a parent or relative, they may be more likely to invest alongside their family without considering their unique situation.

As stated earlier, having a clear picture of your financial situation and where any investment fits into your broader portfolio is critical to successful investing. An investment your parents make may be unsuitable for you and vice versa. For example, investing a large part of your savings into illiquid real estate may not be suitable if you have a child soon going to college. On the other hand, investing in higher-risk funds may not be suitable for your parents if they are relying on that money to fund their near term retirement. It’s essential to think about how a potential opportunity may fit into your portfolio and required liquidity needs before investing.

Mistake #3: Failing to Read the Fine Print

Another common mistake we see NRIs make is relying on promised returns. Outside of a few instruments such as CDs or annuities, there are no guaranteed returns in the financial markets. If someone comes to you with an investment opportunity that guarantees a fixed return, especially one that sounds too good to be true, proceed with caution. Make sure to read the fine print and disclosures. In the US, the SEC requires all investment offers to disclose details on returns as well as communicate any potential risks. SEBI has similar rules in India. Read the fine print, so you can decide for yourself whether that incredible opportunity your uncle told you about is actually too good to be true.

Mistake #4: Not Reviewing Tax Implications

Taxes are a tricky thing. More so, when you have income or assets between India and another country. Depending on the source and type of asset or income, you may have to pay income or capital gains tax in India and your country of residence.

Whether a US citizen or green card holder, for any income that is earned or accrued in India, you will have to pay both India and US taxes, though the US will give you credits against foreign taxes paid. For income earned in the US, you are only required to pay US federal and state income tax, not India tax. Similar rules apply for H1B/L1visa holders as long as they qualify as a US resident and an NRI in the eyes of the tax authorities.

In some cases, investment in tax-advantaged instruments may not be worthwhile. For instance, if you invest in a 529 as an H1B and you decide to relocate to India prior to college, or your child decides against a US-based or US-approved foreign university, you may be taxed on the earnings and pay an additional 10% penalty upon withdrawal. If you invest in an IRA and decide to relocate to India and withdraw that money prior to age 59 1/2, you will be subject to tax at your prevailing income tax rate and a 10% penalty.

It’s important to work with a tax professional who understands both the Indian and US tax system so you can utilize tax advantages and minimize potential payments and penalties.

Mistake #5: Investing disproportionately in Real Estate

Investing in real estate is popular among NRIs. NRIs typically purchase properties for investment, sentimental reasons, or in anticipation of future residence. According to a World Bank report, of $80 billion in remittances in 2018, almost $13 billion was invested in the Indian real estate sector. NRIs are eligible to own both residential and commercial, though not agricultural, properties in India. According to Liases Foras, a real estate research company, NRIs currently own about 8 to 10% of the real estate market in India. Unless one is anticipating returning to India, though, the associated economic and foreign exchange risk may make real estate a less attractive investment than an investment in the equities market.

The NHB RESIDEX, a composite housing price index for 50 Indian cities, returned 4.41% between June 2013 and September 2018. Comparing this to the Nifty 50 over the same period, which generated an annualized return of 13.9%, real estate may not be the optimal asset class for your portfolio.

Conclusion

NRIs have the potential to make costly mistakes when managing their personal finances. All investments should be part of a holistic financial plan. By better understanding your future financial goals, making your own investment decisions, reading the fine print, understanding tax implications, and limiting your real estate investments, you will better protect and grow your portfolio.

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