May 29, 2017
$ The Dollar Dream – Does it make sense to invest in Dollars?
D V Suresh
Certified Financial Planner
$ The Dollar Dream – Does it make sense to invest in Dollars?
Every IFA who deals with NRIs’ must have some time or other come across this statement, “I prefer to hold my money in US dollar deposits because rupee keeps depreciating”
Sounds very familiar and also from a lay man’s view this statement makes sense, as it is a common belief that Dollar always appreciates against the Rupee.
The point to ponder here is by what rate does rupee depreciate. Does it really beat the market investment returns?
A brief insight into some facts and figures reveal, that until the calendar year 2017 the average rate of rupee depreciation was approximately 4%. A study of US Dollar Vs Indian Rupee history for nearly 50 years shows the rate at which the rupee has depreciated over decades. Please refer to the table below:
Similarly, the 2nd table below shows the rate of Rupee depreciation for the same period by taking the 2018 US Dollar rate which saw the highest depreciation in the history of Rupee Vs US dollar. In view of the Rupee depreciating over 10% the average rate of depreciation has gone over 5% as against 4% until 2017.
Now that the average rate of depreciation has gone up to 5.50% as against 4% compared to previous year does it impact investing in India?
The purpose of this study is to see if money invested in India through their NRE account on repatriation basis works out beneficial to the NRIs or does their belief in holding dollars works better.
The Country wise Dollar Deposit Rates are shown in the below table.
A close look at the above chart shows that the maximum rate of return offered in UAE for holding the investment for 10 years is 3.98%, in the USA maximum is 2.40% for a period of 5 years and in Canada, the maximum is 2% for a period of 5 years. The FCNR deposits also offer a maximum of 2.92% for a 5 year term.
For an NRI in USA the maximum he/she earns is 2.40% and in Canada the maximum earned is 2% and in UAE the maximum earned is 3.98%, provided they are held for 5, 5 and 10 years respectively, otherwise the deposits rates are much lesser.
In comparison, let us see what the Indian markets have offered as returns.
The returns shown in the above chart are those of their respective categories. Many funds across all fund houses generally outperform category returns.
A closer look at the above chart, clearly indicates that the category returns of equity-based mutual funds for a period over 5 years are between 11.72% to 21.93%. Even ETFs have given over 12% returns on a 5-year term.
With the introduction of Long Term Capital Gains Tax @ 10%, it is important to study the net returns to the investor.
The following table shows the returns after considering the LTCG tax:
It is clear from the above chart that the Net returns are between 11% and 19% whether the investment period is 5 years or 10 years.
Now from the NRI point of view there are other factors,such as the prevailing deposit rates in their country and also the income tax rates, which needs to be considered before arriving at the Net returns and then take a call whether it would make sense for them to invest in India and repatriate the same with higher benefits. The following chart gives a brief insight of net returns after considering all factors for USA/CANADA( or other countries having Income Tax ) and UAE.
The above chart is for illustrative purpose. In this chart, the assumed return is taken as 15%, 18% and 20% for USA/Canada and for Gulf Countries, it is taken as 12%, 15% and 18%.
After considering the LTCG tax, the applicable approx. Income tax rate, and also giving credit for the approximate Dollar Deposit Rate, the Net Gain has been arrived at.
As can be seen from all the charts above, for short term goals, especially up to 5 years it may not be wise for the NRI’s to invest in India. With US Dollar appreciating nearly 5% and with a Dollar deposit rate of anywhere above 1.5%, it would be wise for NRIs to stay deposited in their respective countries.
However, where an NRI has a long term vision of over 5 years, he/she can definitely consider investing in Indian Markets through Mutual funds or invest in ETFs both in India and USA/UK. As can be seen from the chart above the excess returns ranges from 1.60% to 4.60% over longer terms for USA/Canada NRIs. However, the investment returns at the gross level should be at least 15%, for which due care has to be taken by the Advisor with respect to fund selection and by keeping the period of goal in relevance. For NRIs residing in Gulf countries, any return over 12% at gross level would be profitable, as the net returns would be over 3%.
With the Indian Rupee depreciating drastically and the introduction of Long Term Capital Gains on equity investments, it is very important to study the requirements of the NRI investors in terms of long term needs and goals in addition to risk profiling and taxation before suggesting investing in India.
Note: This article has been updated on 26th Feb,2019 as per the new changes given by the Author.
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Source Courtesy:
- Rupee Vs Dollar Rates: Wikipedia
- https://currencies.zone/historic/us-dollar/indian-rupee
For Dollar Deposit Rates:
https://north-america.deposits.org/
http://www.rbcroyalbank.com/products/gic/us-dollar-term-deposits.html
https://www.bankbazaar.ae/fixed-deposit.html
https://www.icicibank.com/nri-banking/RHStemp/rates.page
https://rakbank.ae/wps/portal/retail-banking/accounts/deposit/fixed-deposit
https://www.icicibank.com/nri-banking/RHStemp/rates.page
For Rate of Investment Returns:
MorningStar and ValueResearch
It is very well researched and convincing article for NRI to invest in India.
Thank you Neepa Khatri
Thanks for the article. Data points are useful to convince client to invest in India than holding on to the dollar. A client in UAE been sold dollar denominated investments on the pretext of ‘rupee is a devaluing currency’. This article is useful to share in this context.
Agreed with your point that, earning returns in India will be superlative even with adjusted with rupee devaluation.
You have assumed scenarios with only dollar deposits. How it will look like if dollar is invested in ETFs like? it will be interesting to compare whether it is still worth investing in India.Appreciate your insight on this.
Dear Raj points well. Sincerely appreciate your views. The article is based on my personal experiences. There is a reason for comparing Fixed Returns to equity returns because, in most cased that I have come across the NRIs keep renewing the FDs for both short term and medium terms and even for goals over 5 years. The purpose of this article was not only to give our friends and colleagues in the industry a new dimension of thought process but also to NRIs to give it a shot.
I am sure each one of us have different points of view. no single method of approach to convince a prospect/client can be considered the only way. This is just one step towards our collective efforts to look at one other segment of our society, where I have seen many IFAs silently give up when faced with a such a situation. I have made a humble effort to inspire my fellow IFAs and planners.
Sorry Kshitija..the above reply was meant for Raj Talati.
Thank you for your views too. Will surely study further based on your inputs. Shall share my views once done.
Thanks Suresh.
A prospect of mine wants to invest in India as well as US equity proportionately. I am trying to find good fit for him. Your analysis came handy for me to refer. Now I have to just research on average ETF returns to base my suggestion.
As per my finding very few ETFs have given double digit returns for 10year plus period. So our NRI friend is still better of allocating more to India growth story. Chances of Rupee stabilizing or appreciating is more now, he is likely to benefit on both counts-equity returns and currency appreciation.
Kshitija research is a continuous process, only then can we find answers. Wish you all the best.
Nice article Mr Suresh. Wish it helps NRIs open their wallets and take a serious look at Indian opportunities for their own benefit. Keep writing such insightful articles. I am happy to have known you personally.
Thank you VVK. You are always an inspiration.
Excellent chart and rupee devaluation analysis.
But, with due respect your article has lot of dated data and wrong comparisons e.g.
1) You have considered short term fund returns between 8.7% to 9.8% which is past performance and actual return is going to be much lower if invested today.
2) So if we consider present short term rates and reduce tax liability of NRI in U.S/Canada together with rupee devaluation there is hardly any arbitrage.
3) In illustration 2 you have compared fixed return with equity returns, which is again misleading.
Dear Raj points well. Sincerely appreciate your views. The article is based on my personal experiences. There is a reason for comparing Fixed Returns to equity returns because, in most cased that I have come across the NRIs keep renewing the FDs for both short term and medium terms and even for goals over 5 years. The purpose of this article was not only to give our friends and colleagues in the industry a new dimension of thought process but also to NRIs to give it a shot.
I am sure each one of us have different points of view. no single method of approach to convince a prospect/client can be considered the only way. This is just one step towards our collective efforts to look at one other segment of our society, where I have seen many IFAs silently give up when faced with a such a situation. I have made a humble effort to inspire my fellow IFAs and planners.
Nice Article… I have received couple of calls in regard to Dollar investment for some reasons I haven’t invested and I always had a doubt about ROI
And now you have forwarded us a very nice article with a proper illustration. Thanks for the article.
Thank you Mohan Kumar
Very good article Suresh. You have discussed this extensively & highlighted it.
Thank you Ramesh. Appreciate your comment. You have been one of my best investors and also one of them who put this challenge before me.
It’s a wonderful article .
The specifications are perfect
Congratulations
Thank you Nandita
Great job
Thank you Anusha
The research and the figure readings in this article is mind-blowing
Very helpful and impressive .
It’s a must forward Article for the readers .
Thank you Gulshan Kumar. Hope it helps. All the best.
Very good article D.V., thanks for enlightenment about the subject. This will really help us to promote sale among NRI community with more clarity. Thanks Amit Shah
Thank you Amit
Good article Suresh. It gives a very balanced and structured view of investing in indian rupees vis a vis dollars along with statistics which make your points convincing
Thank you Sirji
Excellent Analysis
Thank you Rohit
Very nice and well written article. I have forwarded to my nieces and others based out of India. Congrats Suresh
Thank you Raman
Well researched and written article. Thank you Suresh. It does highlight opportunities and timing is about right.
Thank you Ganesh
Thank you Rama.
I do agree that index funds give better returns and that my comparison is not apple to apple. I have written this article purely out of my practical experiences with NRIs. We Indians are more attached to FDs, so where ever we go the mindset follows, so is the case with NRIs. I have seen that mostly the NRIs prefer to hold on to FDs+Rupee Devaluation as investment for their Short/medium goals and even for goals extending beyond 5 years. This exercise was just to open up the thought process for not only NRIs but also among our industry colleagues.
Very well researched article, Suresh! One of the reasons NRIs hesitate to invest in the Indian currency is the ease of repatriation and the timing thereof, tax implications, disclosures, and now FATCA. There is always a fear lurking at the back of the mind on the process. Mathematically, your article clearly shows that it makes more sense to invest in Indian rupees and repatriate the same, when needed. If INR was fully convertible with practically no exchange controls the psychology of the NRI investor would perhaps be different.
Thank you Ramesh. Yes, I agree with you that the Tax implications and disclosures are something we all have to bear with. FATCA declaration though mainly applicable for USA, but the same has to be declared by every investor. Coming to tax implications, yes, USA/Canada and other countries where taxes apply have to be adhered to. However, NRIs residing in UAE/Gulf countries are in an advantageous position as there are no local taxes on incomes. The point to be noted is that the investments in Equity Mutual funds are tax exempt and Debt Mutual funds are tax efficient. As rightly mentioned by you, the full convertibility of INR can really be a game changer.