Wealth Management

Why Indian families must allocate capital to global assets

January 2020

Read Time: 8 minutes

Indian investors have a significant home bias while investing. More than 98% of their savings are invested in domestic markets1. By contrast, US based investors tend to invest 27% in international markets while those in the UK invest about 50% of their investments overseas.1


Should Indians follow suit and allocate more to global assets? We believe yes, and here are the main reasons why this should be a no brainer:


1. Better opportunities and diversification benefits: Limiting your investments to one geography could lead to missing out on great investment opportunities in other markets. For e.g. the US equity markets have provided exceedingly good returns over the last 10 years. An investment in the US S&P 500 index generated an absolute return of around 52% (dollar returns) over the last five years, as against 33% (dollar returns) generated in the same period by India’s BSE 200 index.




Overseas investments provide significant portfolio diversification, as these investments, in general, would have a lower correlation with your domestic portfolio. (correlation between Nifty 50 & Russell 1000: 0.397; Source: Bloomberg, MFI Explorer, Date Range – Jul 2014 to Jun 2019).  This lowers overall portfolio risk, while not compromising on returns.


2. Alignment with a global lifestyle: Indians are increasingly leading a more international lifestyle. Nearly 40%2 of all expenses borne by Indian HNIs are dollar dependent, often directed towards travel, medical treatment, children’s education and the upkeep of family members. Indians spent USD 4.8 billion in foreign travel last fiscal year, as against just USD 44 million six years ago. 

The next generation of HNI families is becoming more global, with many young members of the family pursuing foreign degrees and choosing to live abroad. In 2018-2019 alone, USD 3.6 billion was remitted overseas by Indians for education, nearly 30 times the amount sent overseas in 2013-2014 for the same purpose.

So, the key questions to ask is: are your investments aligned to meet your foreign currency needs? Would a predominantly INR-denominated portfolio suffice going forward? The next point indicates why it may not.


3. Battling INR depreciation concerns: The dollar was 54.28 INR in March 2013, and 65.17 INR in March 2018. From then till November 2019, the INR further depreciated by 10%. Since 2007, INR has depreciated by 5.1% per year against the USD.

As a thumb rule, the higher the difference between the inflation levels of India and a foreign market, the greater the expected depreciation of the INR vis-à-vis the foreign currency.

To bring home the impact of a depreciating INR on future expenses abroad, take the case of a family looking to build a corpus for their children’s education in the US. The average US undergrad college education fees and tuitions plus living expenses increased from USD 40,960 p.a. in 2013-2014 to around USD 49,160 in 2018-20193, implying an annual growth (CAGR) of 3% in dollar terms. But thanks to the depreciating INR, this implied an annual increase of 7% in INR terms. This clearly underscores why saving only in INR may not be sufficient for your dollar-denominated expenses.


4. Building a ‘safer’ nest: The Indian economy grew at its slowest pace in six years - at 4.5% - in the second quarter of fiscal 2020, down from 5% in the previous quarter. The RBI has once again revised the growth forecast to 4.9-5.5% for the second half of fiscal year 2020 and 5.9-6.3% for the first half of fiscal year 2021.

Given the muted economic forecast as well as uncertain market environment, it has become imperative for domestic investors to look for returns and safety in other geographies. Developed market assets and high-quality international securities can provide a ‘safe’ nest in these times.


Taking the LRS Route to a build a global portfolio: It’s legit and simple, really


In 2004, the RBI introduced the Liberalised Remittance Scheme (LRS), which allows Indian investors to legally remit a certain amount of capital overseas every year. Apart from travel, education and other expenses overseas, these remittances can also be directed towards investments in overseas stock, properties, bonds and deposits. 


Currently, resident Indians (including minors) can each send up to USD 250,000 abroad annually under the LRS, without prior approval from the RBI. The frequency of sending money abroad has no restrictions, as long as the cumulative total is under USD 250,000 per financial year. (Please click here for FAQs on LRS.)


This mode of remittance is fast gaining traction. The total remittances under LRS grew from USD 1,206 million to USD 13,787 million (11x) from 2013 to 2019. However, only a small fraction of these remittances was channelled to equity or debt investments abroad. We think this is because there is still a lot of confusion and lack of awareness about the options available. 


In USD Million

2018-2019

2017-2018

2016-2017

2015-2016

2014-2015

2013-2014

Growth since 2013-2014

Outward Remittances (under LRS)

13,787

11,333

8,170

4,642

1,325

1,206

11x

Investment in equity/debt

423

441

443

317

195

236

2x

Investments in equity/debt as % of total LRS outgo

3%

4%

5%

7%

15%

20%



Source: As per RBI bulletin on Liberalized Remittance Scheme as on 31st March 2019 

How to invest abroad under the LRS: Choosing the right offshore solution

While investments under LRS is still an evolving space, there are professionals who have expertise in this niche and are well positioned to provide solutions. Since this is a relatively new area, we recommend that investors find a professional advisor who understands the LRS and offshore investment management spaces thoroughly.

Below are some of the key things to keep in mind while building an offshore portfolio under LRS:

1. Investment Manager selection: Appoint an investment manager who is regulated (preferably in the US, UK, or Singapore) and has an investment vehicle / pooled offshore fund that can accept money from Indian residents. Ensure the manager has a good offshore investment team with global portfolio management and asset class expertise. They should ideally also have an open architecture product platform, which means they are able to provide access to a large variety of products from different AMCs

2. Vehicle and jurisdiction used for investments: Investment managers often use pooled investment vehicles to manage global money. Make sure the vehicle being used is regulated, legally robust, and operationally efficient. The jurisdiction of the investment vehicle can have a large impact on your costs and taxes. Choose a jurisdiction that minimizes taxes, while ensuring good governance and wide access to global investments. Jurisdictions that are favoured by western regulators like the SEC can be a safer bet

3. Safety, liquidity and quality: If you are building an offshore portfolio for the first time, staying conservative may be a good idea. You could focus on protecting capital with modest growth and later dial up or dial down on risk, based on your comfort level. Understand how liquid the portfolio will be. Is there is a lock-in period or an exit load? What will the impact be in case of a run on markets? Do not invest in something you do not fully understand. Global markets have much richer data available. Insist on more information when unsure. Starting off with ETFs and mutual funds from reputed global AMCs may be a good idea

4. Regulations, tax and compliance: Complete adherence to LRS rules is essential. This part can be ensured by partnering with professionals who know the space well and are themselves regulated entities. Appoint a taxation expert to understand the tax implications of your offshore investments, as these vary case by case

5. Costs and interest alignment: Apart from investment management fees and underlying manager fees, pooled offshore funds typically also have other operational expenses. Ask your manager to disclose the breakup upfront. Check the incentive structure of your manager. Paying performance fees for passive investment funds may be suboptimal 

6. Ease of execution, servicing, monitoring and reporting: LRS investments have two legs. One is remitting money abroad, and the other is directing the remitted money to the chosen investment opportunity. All of the major banks in India can help you remit money under the LRS. To ensure the second leg of the execution is smooth, check the operational capabilities of the service provider. We recommend partnering with an entity with a local presence. This will ensure high quality, round the clock servicing. Also, do insist on regular updates and timely digital reports post the investment 


Avendus Wealth Management believes there is significant merit in diversifying your investment portfolio beyond local markets. While this space is still evolving and highly nuanced, we foresee it  to becoming a large part of wealth management going forward. For Indian HNIs, LRS-based investments represent a critical step in ensuring a well-rounded portfolio, enabling access to similar global opportunities as available to their international counterparts. 

To know more about investments under the LRS route, do reach out to your Avendus Wealth relationship manager or write to us at wealth.updates@avendus.com

Please click here to view the Avendus disclaimer.

  1. https://www.livemint.com/Money/lDZIlywkAijJp1AcidZTGM/Why-Indian-investors-should-look-at-global-markets.html
  2. Source: Knight Frank
  3. Source: research.collegeboard.org/trends
Author: Arvind Bansal, Executive Director and Head, Products and Advisory, Avendus Wealth Management

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