Many NRIs live with their feet in two worlds, living the American dream while tied to India through family, assets, or business. These ties play an important part in planning your financial future. If you are a US-based NRI with strong ties to India, just as you balance your life, you need to balance your investments. Ask yourself the following:
Where will I raise my family? Where will my children attend college? And where will I retire? If your answers are a combination of both the US and India, you need to invest your assets accordingly.
Why Diversification is Important?
Diversification, or maintaining a mix of investments within your portfolio, is an important strategy for protecting your assets. Diversification across asset classes protects your portfolio from collapsing due to a large decline in the price of any one type of asset. If you have a mix of assets, a significant decline in the stock market, for instance, will not sink your entire portfolio as you may have price increases in other investments, such as bonds.
Diversification is also an essential strategy for growth. Given the unique profile of an NRI with future cash needs in both countries, diversifying across geographies is important. This means your portfolio should have a mix of US and India-based investment.
Factors to Consider for Geographic Allocation
When thinking about how much to invest in the US versus India, the amount and location of your future cash requirements play an important role. You also need to think about your time horizon – are you five, ten or thirty years away from relocating to India?
- What is your Time Horizon in the US ?
NRIs who intend to stay in the US for an extended time should allocate more of their portfolio to US markets rather than India. This is to match the currency of investment income to expenses and thereby reduce forex risk. For example, if you are a permanent resident and many years away from retirement, you should allocate most of your investments in US-based assets.
- Where do you plan to Retire?
If you plan to retire in India, the majority of your future expenses will be in INR, making it a good idea to invest more in Indian-based assets to reduce currency risk. The closer you get to a long-term or permanent return to India, a greater proportion of assets should be reallocated to Indian investments., especially as you near your retirement date.
- What is your Visa Category?
For NRIs who are on temporary visas such as H1B or L-1, it might be challenging to estimate the time frame of their stay in the US and their plans. A good rule of thumb in such a case would be to apportion the investments between the US and India in the same ratio as their expenses in both the countries. For example, if your monthly expenses in US dollar is $ 4000 and in Indian rupees is $ 1000, then it would make sense to invest 80% of your portfolio in US-based assets and the rest in Indian assets.
- Are you saving for a Big Ticket Expense ?
If you are saving for a down payment for home or college tuition, the majority of assets should be US-based. US-based assets have lower volatility and generally smaller price fluctuations. Over the long term, you will see a slow and steady growth of your portfolio, allowing you to fund your obligations as they come due.
- Saving for Contingencies
One should always have a three to six-month emergency fund and this should be invested in US-based assets. The investment should be in a low volatile and highly liquid asset.
Choosing the Right Asset Class
Once the right geography mix is determined, then one can apportion the investments in the following asset classes.
*This Pie-chart is for illustrative purpose only and should not be construed as investment advice
- US Stocks
US Stocks is one of the best performing asset classes and has outperformed other major asset classes in the long run consistently. As the largest economy in the world and the hub of technology and innovation, the United States remains a very attractive investment destination. Any investment portfolio without exposure to the US stock market is incomplete, no matter what the profile of the investor.
- Indian Stocks
India, as one of the fastest-growing world economies, remains a compelling investment destination. Advanced markets, like the US, tend to grow at a slower rate than developing markets like India. In 2018, the US economy grew by almost 3% while India grew by approximately 7.5% according to the World Bank. Diversifying your portfolio to hold both slower growth, lower volatility US-based assets, and high growth, more volatile Indian assets will give you better risk-adjusted returns.
- Fixed Income
One should consider investing in fixed income instruments if the time horizon of your investment is less than three years. High yields savings account or bank deposits are a good option in such cases. Always keep in mind that the interest rate offered by US banks in dollars would be lower than the interest rate offered by NRE accounts in Rupees. This should not be construed as that NRE account is the more attractive option. The difference is merely because of the inflation differential between the two currencies, and the real returns will be more or less same in both cases. On the other hand, retaining the investments in US dollars could be a better option as the US dollar is more stable and you can avoid the forex conversion charges if the intended use of the money is also in US dollars. The funds deposited in US banks are also FDIC insured to the extent of $ 250,000.
- Alternate Investment Options
Other options one might consider is Real Estate or commodities such as Gold. We generally don’t recommend investing in these assets, because historically their returns have been lower than that of equities. But despite this, if you have a strong inclination towards investing in these assets, then we would recommend investing in REITs (Real Estate Investment Trusts) and Gold ETFs rather than investing directly in a house or physical Gold.
NRIs need to consider a variety of factors when investing for their future. An investment plan that considers current and future funding needs in both the US and India is critical. Diversification and getting the right geographic and asset mix between the US and India will help you successfully balance your future in both countries.