How NRIs can make the most from Indian debt markets   Nov 10, 2012

The current interest rate scenario makes India a lucrative investment destination for risk-averse NRIs who are in search of preserving capital or their hard earned money. When compared to the U.S., Euro-zone and the other BRICS nations, India offers higher interest rates. For example a 1-Yr bank fixed deposits offer interest rates in the range of 7.25% - 9.0% p.a.

This lucrative coupon / interest rate scenario has thus contributed to fair amount of depth in Indian debt market, well supported by domestic investors as well as the Foreign Institutional Investors (FIIs). Today in the fixed income segment there are host of investment avenues available such as corporate bonds, corporate deposits, Government Securities, debt mutual funds, fixed deposit with a bank and non-convertible debentures; in which even you can invest as NRIs.

Now there being a number of debt investment avenues available for you to invest as an NRI, you ought to be clear whether you would like to invest on a repatriation basis or a non-repatriation basis, as this will help you choose the right investment instrument. The following investment instruments allow you to invest without any limit on a repatriation basis and non-repatriation basis:

  • Dated Government securities (other than bearer securities)
  • Treasury bills
  • Bonds issued by Public Sector Undertakings (PSUs) in India
  • Units of domestic debt mutual funds

However, units of money market mutual funds in India and National Savings Certificates are strictly allowed to be held on a non-repatriation basis. For investment purpose one can also maintain their NRE account or NRO account (as the case may be) in a term deposit form. But in case of NRO deposits interest income would be liable to income tax, while for NRE account, the accrued interest income as well as balance held would be exempt from income tax and wealth tax.

It is noteworthy that securities purchased and held by you, can be sold only through the recognised stock exchange (via a recognised stock broker) or tender them back to the issuer for re-purchase or at maturity. Moreover, transfer of securities to other NRI is also not barred by Foreign Exchange Management Act, 1999 (FEMA), provided the purchase of such securities / units was made on a repatriation basis.

But apart from being cognisant about investing in NRE or NRO term deposits, if you aren’t well-versed about other debt investment instruments; routing your investment in the Indian debt market via debt mutual funds would be a prudent decision to take.

At present there are various categories of Indian debt mutual funds, in which you may invest. They are:

Type of Fund Invests in...
Liquid Funds Mainly invest in very short term money market instruments with maturity upto 90 days. Also invest in call money
Liquid Plus or Ultra Short Term Debt Funds Portfolio is comprised of a mix of certificate of deposits, commercial paper, call money and other money market instrument with slightly higher maturity than the instruments held in liquid funds
Floating Rate Funds Typically invests in short-term instruments offering flexible interest rates i.e. whose interest rate reflects the prevailing interest rate in the country
Short Term Income Funds Have exposure to short-term bonds, deposits and NCDs. May also invest in T-bills and Government securities with maturity of less than 3 years
Dynamic Bond / Flexi-Debt Funds Such funds invest in short term as well as in medium-term bonds, NCDs and G-secs
Long Term Income Funds Invest in corporate bonds, debentures and G-secs with maturity of more than 5 years
Gilt Funds or G-sec Funds Invests only in securities issued by the Central and State Government.
Fixed Maturity Plans of 3 months to 36 months Have exposure to bonds and NCDs having maturity profile in line with the horizon of the Fixed Maturity Plan (FMP).

But before you decide on which one of them to invest in, you need to be sure of your investment time horizon and liquidity preference. Also, you need to be well-versed with the prevailing interest rate scenario, so that you can make a correct investment decision which can optimise your returns.

So, what should be your investment strategy in the current interest rate scenario?

With markets expecting the central bank to cut rates to provide an impetus to economic growth, and fall in Brent crude oil prices making it conducive to do so; the sentiments are expected to remain positive for some time in bond markets. However, the weakness in Indian rupee and CPI and WPI inflation being above the comfort range (6.0% to 7.0%) of RBI may be a hurdle for any market friendly move by the central bank.

Hence at present while taking exposure to debt mutual funds and fixed income instruments, you should clearly know your investment time horizon. Since short-term rates may still be high in the near term and then ease due to liquidity infusion; you can benefit from being invested in debt mutual funds having exposure to shorter maturity instruments.

If you have an extreme short-term time horizon (of less than 3 months) you would be better-off investing in liquid funds for the next 1 month or liquid plus funds for next 3 to 6 months horizon. However, if the investment time horizon is short to medium term (of 1 to 2 years) you may allocate a part of your investments to short-term income funds which should be held strictly with at least 1 year time horizon.

The present scenario also seems comfortable to look at longer horizon debt mutual funds. Thus, if you have a longer time horizon, you can now hold some exposure to pure income funds. Since longer tenor papers will become attractive, longer duration funds (preferably through dynamic bond / flexi-debt funds) can be considered, if one has an investment horizon of say 2 to 3 years. However, one may witness some volatility in the near term as there is always an interest rate risk associated with longer maturity instruments.

Fixed Maturity Plans (FMPs) of upto 1 year would continue to yield appealing returns and can also be considered as an option to bank FDs only if you are willing to hold it till maturity. Since NRIs aren’t refrained from investing in FDs, they can also be considered due to the luring rate of interest offered on them. Also if you have an investment in Public Provident Fund (PPF), before you became an NRI, you can continue to invest in it too until maturity on a non-repatriation basis.

This NRI article has been authored by PersonalFN, exclusively for Quantum Mutual Fund. PersonalFN is a Mumbai based personal finance firm offering Financial Planning and Mutual Fund Research services.

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