In the face of continuing volatility in the Indian markets, in tandem with a faltering economy and a depreciating currency, non-resident Indian investors are left with limited options for a safe investment avenue.
NRIs who plan their financial future are often faced with a difficult question: Should they invest in dollar-denominated investments in the country where they live or send money back home to invest in property, stocks or park in fixed deposits?
“One challenge with local investment in India is that the Indian rupee has fluctuated significantly in recent years, with a continual downward trajectory,” said Rajesh Nair, Dubai branch manager, Alliance Insurance.
“The rupee has lost approximately 41% of its value against the US dollar since its height in 2011, for an average depreciation of more than 5% per year.
“For that reason, it is sensible to diversify into a dollar-denominated global investment strategy.”
Diversify portfolio
The purpose of diversification is to guard against risk.
It is designed to protect the investor because when one investment loses money—whether through depreciation, or other market conditions — that loss is more likely to be offset or minimised by the performance of other investments.
To that end, there are several advantages to dollar-denominated investments that make them a worthwhile addition to a well-diversified portfolio.
Nair said one significant benefit of dollar-denominated investments is that they are a stable hedge against the depreciation of the Indian rupee.
Explaining how significant is the difference, Nair said: “Had you purchased an insurance plan for INR10m ($135,561, £103,939, €114,894) in 2011, when the rupee had an exchange rate of INR44.20 to $1, your insured amount would have been the equivalent of $226,244 in 2011.
“But the current value of that plan would be just $145,015, a depreciation of nearly 36%.
“By contrast, if you had purchased a dollar denominated policy for $226,244 in 2007, its current value in INR would be INR15.6m.”
Portability benefits
Dollar-denominated insurance and investment products are also easily portable anywhere in the world.
Most insurance plans offered in the UAE are based offshore, and will continue to cover the insured during foreign travel or after permanent international relocation.
This reduces costs because investors can retain the same investments throughout their lifetimes, without the need for currency conversion or the purchase of a new product upon relocation to a different country.
Dollar-denominated investments have proven stable in present times of regulatory uncertainty.
The financial crisis of 2007/08 led to an increasingly complex global regulatory landscape.
While there has been a push for deregulation, many investors have looked with skepticism upon investment products denominated in fluctuating currencies in emerging markets, fearing such investments may prove unstable and lead to further crises.
By contrast, the dollar has never been devalued and the currency notes have never been invalidated, like what happened in India in 2016.
For this reason, the dollar is the unofficial global currency, and comprises more than 60% of all known central bank foreign exchange reserves worldwide.
Stability and portability help explain how dollar-denominated investment and insurance products facilitate a faster claims process: these products are less prone to foreign-exchange fluctuations, making valuation, calculation, and payout of claims a simpler and more efficient process.
“As well, UAE-based insurance providers have many years of experience processing and paying out claims in foreign countries, streamlining the claims process even further,” Nair said.
The portability of dollar-denominated plans means it will be easier for investors to access high-quality medical care, whether in the UAE or anywhere else in the world, should he need to seek treatment for critical illnesses.
Reallocation strategy
Investment advisers also recommend a reallocation strategy by which NRI investors shift their investments to different portfolios such as migrating to debt funds or switch to US-focused INR funds, as they performed well in the past two years.
Jojo James, chief executive, Fosbury Wealth Managers, and partner of Tamim Chartered Accountants, Dubai, said NRI investors should adopt a reallocation strategy by shifting funds to safer avenues.
As the market outlook is grim, James says that those who have invested lump sum in equities or equity mutual funds will see their investment value depreciated when the markets are on a bad patch.
