Despite living in Dubai for 25 years, Niranjan Gidwani still feels more comfortable keeping a portion of his wealth in India.
And the favoured investment of choice in recent years for the deputy chief executive of Eros Group, an electronics retailer, has been mutual funds.
“I started investing in mutual funds about eight to 10 years ago when my father was handling my savings for me,” says Mr Gidwani, 56, who is from Pune, in the west of India. “I invest in five to six separate funds and, on the whole, as an asset class, mutual funds have performed well for me.”
Mr Gidwani says the main advantage is the lack of capital gains tax for any equity funds held for more than a year. But the executive’s portfolio also includes fixed deposits and property in India because he feels it is important to have a basket of investments to spread any risk.
“My rationale for saving is to balance out investments between here and in India,” Mr Gidwani says. “This is linked to the fact that in the case of the principal bread-earner’s demise here, the process of getting assets released to next of kin in this part of the world is still not simplified and takes a lot of time.”
Mutual funds pool money from investors, which is then allocated to securities such as stocks and bonds by the fund manager. The investor is effectively buying shares in the mutual fund. In the case of an equity mutual fund scheme, the fund manager will pick and invest in a range of stocks to deliver returns to the investor.
There are more than 40 mutual funds in India, which grew at a compounded annual growth rate of 15 per cent between 2007 and 2013, according to a report by KPMG.
Raghvendra Nath, the managing director of Ladderup Wealth Management, based in Mumbai, says he has noticed growing interest among non-resident Indians (NRIs) based in the UAE wanting to invest in mutual funds.
He attributes the increase to the optimism surrounding India’s economic prospects compared to many other emerging market countries, and says the funds are a “safe vehicle” for expats because they are managed by professionals and are diversified.
However, he stresses that NRIs still only make up a small proportion of the investors in these investment vehicles.
“One reason for this is a lack of understanding and another reason is that a lot of NRI money was going into real estate in India,” Mr Nath says. “Obviously if somebody is investing a large amount of money in a property then their other risk investments take a back seat. That is changing now because the property market in India has been kind of subdued and other investments, such as equity investments, are going to take preference.”
Mutual funds in India are available for a range of risk appetites says Mr Nath, who advises clients to select a product based on their time horizon for accessing the money.
“For somebody who has a low-risk profile, I would advise them to invest in a fixed-income fund, so it could be a short-term bond fund or a corporate debt fund if it’s for a longer horizon,” he says.
Experts say NRIs should consider a well-managed mutual fund over investing directly into equities as the fund manager can dedicate time to research and pick stocks. Expats, on the other hand, are often too busy to do this themselves and may not have the same level of knowledge about the markets.
Diversified large cap funds in India have delivered returns of 100 per cent over the past five years, Mr Nath says.
But he adds that with such a wide range of funds available in India, choosing the right product can be daunting. He recommends NRIs consult experts such as a bank’s wealth manager or an independent financial planner and should beware of the pitfalls of investing.
What some NRIs fail to realise is that while the value of a mutual fund investment can go up, it can also decrease and there is an element of risk involved.
And anyone signing up for a new investment product must find out the management costs and fees involved and beware of unscrupulous fund agents or advisers pushing unsuitable products to secure a quick commission.
Ashish Mehta, a lawyer based in Dubai and founder of his own firm, Ashish Mehta Associates, experienced this for himself.
After investing in several funds for the past few years, he says he has “had enough” and is now “waiting for them to come up [to increase in value] so I can sell and exit”. “These funds have a large component of cost built in, so the fund manager earns money and charges a fee whether you gain or you lose,” he adds. “You don’t necessarily know how much the fund manager is siphoning out. If you buy bonds from banks or Indian state entities, you get a fixed return.”
While Mr Gidwani believes it is important to get professional advice before investing, he urges NRIs to tread carefully.
“I have been seeking professional advice from consultants who are good at this business,” he says.
“The key here is not just the functional expertise of the consultant, but also a little bit of research to be done to assess the honesty and integrity of the consultant or the consultancy firm. Some of my family, including my father, have been swindled by reputed consultants with very good knowledge but very low ethics.”
For those unsure if the mutual fund they have chosen is best for them, Jimeet Modi, the chief executive of Samco Securities, says NRIs should assess the track record of the fund manager.
“Mutual funds as an institution are well regulated by the Securities and Exchange Board of India. They have high-calibre professional fund managers who track and research stocks to invest in the best interest of the investors.
Such level of dedication is practically not possible for an NRI staying abroad, Mr Modi says, adding that investing in mutual funds, and India in general, is a good long-term play for NRIs given the county’s economic growth and prospects.
“The best solution for them would be to invest through mutual funds which have good track records. In the long term, equity investments outperform all other asset classes, and the best way to participate in the equities is through low-cost index funds for long-term inflation adjusted superior returns.”
Mr Modi tips growth-oriented or large cap mutual funds as attractive options. “Good funds” have delivered compound annual growth rate returns upwards of 17 per cent over the past 10 years, he says.
“Equity investments for the long term can be started any time in mutual funds without waiting for the so-called ‘right time’,” he adds.
“The best way is to invest fixed amounts systematically every month. However, in the current scenario, subject to risk profile and age of the investor, one should invest 50 per cent of savings in index equity funds and the balance of the amount to be staggered and invested over a period of the next six months.”
He also recommends restricting the investment spread to two or three funds.
“No purpose would be served with too much diversification as by nature the mutual fund schemes inherently have sufficient diversification and risk management,” Mr Modi adds.
A guide to investing in mutual funds
There is a vast array of different mutual funds, from domestic stock funds to sector funds, bond funds and blended funds. Choosing which is best for your individual needs can be difficult so here are some pointers to consider before you part with your hard-earned dirhams:
Assess why you are investing
Investors should consider what the money they are investing is ultimately for and when will they need it. Is it for their child’s education or part of a nest egg for retirement? This will help to determine which mutual fund might be most suitable.
Assess your risk profile
Mutual funds carry various elements of risk, with equity funds considered to be far riskier than fixed-income funds. Sector funds, which invest in a particular industry, such as technology or pharmaceuticals, are considered even riskier. These can deliver soaring returns or sharp losses, while a lower risk fund is designed to deliver steady returns. The risk level of the fund will normally be specified in the basic literature on the product.
The fund’s track record
Investors must assess the track record of the fund. What kind of returns has it delivered over the past few years? Remember though, a fund’s past performance is by no means a guarantee of its future performance so it is essential do careful research or seek the advice of a professional.
Open-ended funds can be bought and sold on a continuous basis, although there may be a fee to pay if you exit within a year. Close-ended funds have a maturity period, for example five years, and investors subscribe at the launch period.
How much to pay in
Investors can either pay a lump sump investment or most mutual fund schemes also offer the opportunity to invest on a monthly or quarterly basis, through what is known as a systematic investment plan. The minimum instalment amount is typically 500 rupees (Dh28). For a lump sum, the minimum would be 5,000 rupees.
Understanding the costs of any investment is crucial. For mutual funds, there are annual management fees and commission to be paid. For example, in the case of equity mutual funds schemes bought through ICICI Bank’s, upfront brokerage charges can go up to 3.25 per cent of the amount invested, while there is an annual management fee of up to 1 per cent.
How to invest
NRIs based in the UAE can invest through Indian banks, with the option to do this online, as well as through brokerages and fund companies. For example, at major Indian banks such as HDFC, existing customers who register can invest in mutual funds through the net banking service. The online portal FundIndia.com also allows users to invest in a wide range of mutual funds online. NRIs have to register by filling in a form and sending copies of various ID documents such as proof of address to the firm in Chennai.
Turn to a reliable financial adviser or do your research online. Websites such as Moneycontrol.com have useful tools for comparing the performance, fees and other details of mutual funds side by side. Experts generally advise investors against putting all their eggs in one basket and say that investing in two or more mutual funds can help to spread the risk.
Follow us on Twitter @TheNationalPF