4 Investments That NRIs Should Avoid

Just like not all paths lead to Rome, not all investments are equal. Navigating this landscape can be even more challenging due to regulations and distance from the Indian market. While diversification is key, it's crucial to understand which investments might not be the best fit for your financial goals and circumstances.

Investing is not a one-size-fits-all activity. Investors have different goals, risk appetites, time horizons, and preferences. What works for one investor may not work for another. Therefore, choosing the right investments that match your investment objectives and suit your profile is important.

Understanding common mistakes NRIs make when investing in India can help avoid unnecessary risks and ensure a more balanced portfolio. Read more about the Mistakes NRIs do while investing in India‍

However, many NRIs tend to invest in all the instruments that are available in the Indian market without doing proper research or understanding the implications. This can lead to suboptimal returns, high costs, tax issues, legal hassles, and even losses. In this article, we will discuss some of the investments that NRIs should avoid and why.

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1. Unit Linked Insurance Plans (ULIPs)

ULIPs are hybrid products that combine insurance and investment. They offer a life cover along with a choice of funds to invest in. While they may seem attractive, especially with tax benefits, NRIs should be cautious while investing in ULIPs.

High charges: ULIPs have multiple charges, such as premium allocation, policy administration, mortality, fund management, and surrender charges. These charges eat into the returns and reduce the net value of your investment.
Lock-in period: ULIPs have a lock-in period of five years, during which the investor cannot withdraw or switch funds. This limits the flexibility and liquidity of the investment.
Low returns: The returns of ULIPs depend on the performance of the underlying funds, which may not be consistent or aligned with your investment goals.‍
Investment choice: The choices within ULIPs are limited, restricting flexibility and hindering optimal portfolio diversification.

While ULIPs may have risks, there are other insurance options that NRIs can consider for better financial protection, discussed in "Should NRIs Get Insurance in India?" Read to know more.

2. Direct Stock Investment

Investing directly in stocks can be tempting, especially with the allure of potentially high returns. While this can offer high returns in the long term, it also involves high risks and challenges for NRIs.

High volatility: The stock market is subject to fluctuations due to various factors such as economic conditions, business performance, news, events, sentiments, etc. This can cause the prices of stocks to rise or fall unpredictably, exposing you to high volatility and uncertainty.
Research and monitoring: Investing in stocks requires a lot of research and analysis to identify the right companies, sectors, and trends. It also requires regular monitoring and review to track the performance and make timely decisions. Due to the time difference, this can be time-consuming and difficult for NRIs.
High brokerage and taxes: Investing in stocks incurs brokerage fees paid to intermediaries like brokers, banks, or depository participants, which vary based on transaction type and frequency. Capital gains from stock investments are subject to taxes - short-term or long-term, based on the holding period, further impacting your net returns.‍
Operational difficulty: To invest in the stock market, you will require a demat account. The process of opening a Demat account is offline and tedious.

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3. Equity Futures & Options (F&O)

Equity F&O trading involves speculating on the future price movements of stocks or indices, leveraging derivatives contracts. They are used for hedging, speculation, or arbitrage purposes. Equity F&O is not advisable for NRIs for the following reasons.

High complexity: Equity F&O are complex and sophisticated instruments that require a thorough understanding of the concepts, strategies, and risks involved.
They are not suitable for novice or inexperienced investors, who may not be able to comprehend or manage them effectively.

High leverage: Equity F&O involves using leverage, meaning you can trade with a higher amount than the actual investment. This can amplify the returns as well as the losses, depending on the movement of the stock price.
Leverage can also increase the margin requirements and the risk of margin calls, forcing you to liquidate the position at a loss.‍
High regulation: Equity F&O is subject to strict regulations and restrictions by the Reserve Bank of India (RBI) and the Securities and Exchange Board of India (SEBI) for NRIs.

You must follow the Foreign Exchange Management Act (FEMA) and the Income Tax Act for equity F&O transactions. You must also obtain the necessary permissions and approvals from the authorities and comply with the reporting and documentation requirements.

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Unregulated Investments

The allure of high returns can be tempting, but venturing into unregulated investment avenues carries substantial risks.

They are often new, innovative, or unconventional investments that offer high returns but carry high risks. Some examples of unregulated investments are agri-tech platforms (like Growpital) and digital assets (Non-Fungible Tokens - NFTs).

These markets are often opaque, lack regulatory oversight, and are susceptible to scams and fraudulent activities. You should exercise extreme caution and avoid investing in anything not approved by a regulatory authority.

High uncertainty: Unregulated investments are subject to high uncertainty and unpredictability. They are also prone to fraud, scams, hacking, theft, or loss, as they are not protected by any security or insurance mechanisms. You may not have any recourse or remedy in case of any dispute or default. The best example is the recent ban on Growpital by SEBI.

Highly illiquid: You cannot easily convert these investments into cash or sell them in the market. They may not have a standard or transparent pricing mechanism or a reliable or accessible platform for trading.

You may face difficulties or delays in exiting or redeeming the investment, especially in times of distress or emergency.

In addition to direct stock investments, NRIs should also be wary of US-listed India ETFs, which pose similar challenges in terms of volatility and regulatory concerns. Read more about Why NRIs Shouldn't Invest In US Listed India ETFs like INDA/INDY here.

Conclusion

While the temptation to explore various investment options may be strong, it's crucial to prioritise stability, transparency, and regulatory compliance.

The key to successful investing is understanding your risk appetite, investment horizon, and financial objectives.

Mutual funds offer a compelling alternative for NRIs. They are a good gateway to participate in India's growth story while benefiting from diversification. With diverse options, mutual funds cater to various investor needs.

Mutual funds offer instant diversification across stocks or bonds and reduce the risk. Professional fund management saves your time and effort in managing the portfolio.

Platforms like iNRI make investing in mutual funds seamless and convenient for you. With automated investing options and expert guidance, you can build a well-diversified portfolio that aligns with your financial goals and risk tolerance.

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NRIs can consider safer and tax-efficient options like ELSS funds. Here are the top ELSS funds for NRIs.

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