by Ms. Uma Shashikant,
Centre for Investment Education and Learning.
If returning to India is even a remote
possibility, non-resident Indians (NRIs) should accumulate wealth with that
relocation in mind.
Assets, skills and attitudes will all figure in
the strategy.
My cousin has a problem. She is not sure if her
son is rich or / poor. The boy went to the Middle East after his graduation.
Fifteen years down the line, he wants to return
to India in the interest of his children's education.
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| Ms. Uma Shashikant, Centre for Investment Education and Learning. |
In the years he was away, he was the envied NRI
who lived in an air-conditioned home, drove a fancy car and visited India
annually with wife and kids duly embellished in gold.
He also managed to buy three flats in his city. So
why is mommy dearest tense?
First, the son is nudging 40 and is too young to
retire. But neither his education nor his experience are adequate to find him a
second job in India. In the 15 years that he has been away, India has changed
dramatically.
There are millions of youngsters, smarter and
better skilled, who are willing to work for a fraction of the money our
Saudireturned man expects to be paid.
Second, the wife did not have a work permit and
is unwilling to work to earn a supporting second income. My cousin has proposed
various options, including running a crèche from home.
Protect the family's social status..!
But, the wife views it as socially unacceptable
to venture into things that expose the family as needy of income.Her eagerness
to protect the family's social status comes in the way of rational thinking.
Third, the property bought by the son is not
earning any income. The family plans to live in one of the houses. The parents
live in the second one. The third is an incomplete project on the outskirts of
the city, which has remained incomplete.
The glut of new houses in that area means the
house can neither be sold nor rented in the near future.
Fourth, apart from the three houses and a huge
pile of gold jewellery, there is a small amount in the bank as deposits. There
are no other investments to fall back on.
This story is not very different from the ones I
hear from young professionals who work on projects abroad and return to
investments in houses and gold, and worry about jobs.
Relocation is a big decision and should receive
as much attention as other financial goals such as education and
retirement.There was a time when NRIs used to be called non-returning-Indians.
Times have changed. Some are returning to explore
the new opportunities in India; some love the possibility of turning
entrepreneurs; some return with the sense of having earned enough to pursue a
new path. But not all relocations are joyous.
Some like my nephew, return because they are in
the middle--not rich enough to send kids to an international school, but not
poor enough to start over.
NRIs should build wealth..
If returning to India is a possibility, NRIs
should build wealth with that relocation in mind. Assets they build, skills
they acquire, and attitudes they sport should align with the relocation
strategy.
If a new business is the big idea, capital,
networks and skills should be in place before relocation. If building and
working on an organic farm with a home-stay is the plan, property purchase
should strategically be tuned to that goal.
Gold fails the test completely. Returning NRIs
who take loan against gold to begin a new business are placing their assets at
risk. First, they add on the burden of repayment to their fragile incomes.
Second, they discount the value of the asset and
realise only a portion of it as loan. Third, if the business does not generate
income, they risk losing the asset. Investments in gold should ideally not
exceed 10% of the household's wealth.
Investment option..!
Real estate and property as an investment option
is a scam. Not only is rental yield abysmally low, the property market in India
is too murky to qualify as a long-term investment.
The problem is that NRIs see a fancy home in
India as an extension of their social status. Large mansions on the outskirts
of Kerala's cities occupied by families that have no income, is testimony to
wrong choices.
Financial assets enjoy a high level of flexi
bility & liquidity. 60% to 70% of an NRI's portfolio should be in financial
assets deposits, equity, bonds. It is easier to switch and modify this
composition from growth to income and back, as required.
Investment Portfolio..!
A portfolio with 60% in financial assets, 30% in
property and 10% in gold should enable NRIs to relocate with lesser pain, with
a greater possibility of earning a supporting income until they find a new job,
or their new business takes off.
What if the asset allocation is already skewed?
A ruthless re-balancing is in order.
An asset is useless if it does not support the household
during times of need. The sale of one of the houses and part of the gold is
likely to generate a good corpus that can be invested to generate a steady
income.
Reluctance to do so, due to social pressures can
lead to an asset-rich and cash-poor situation, a recipe for day-to-day discord
at home.
Many are unwilling to sell at a loss. Property
prices are represented in nominal terms, so the sale looks like a bad deal when
prices move up over the years.
Emotional angle..
Gold is seen as a perennial asset, whose sale
signals desperation. This is why relocation decisions need the solid support of
a reliable external ex pert.
Due to the emotional angle involved, it would be
tough to make rational decisions.
Parents, spouse and eager relatives are likely to
provide advice that might aggravate the problem than solve it. It is quite
common for young professionals who get a posting abroad to lament the large
amount of money stuck in a housing project that is unfinished.
Well-meaning parents are usually behind that
ill-conceived idea to buy a house.
Rework & rehash..!
Wealth needs to move in tune with the life-stage
of the household. Relocation can modify the financial status significantly,
apart from coming with large one-time expenses and write-offs with respect to
the household's personal expenses on car, furniture and the like.
Without flexible assets and a clear-headed view
to sell, rework and rehash, my cousin's question will remain a puzzle.
Rich or poor? Can't say.
About the author..
Ms. Uma Shashikant is Managing Director at Centre for Investment Education and Learning.
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