Why should one Invest in the Indian Stock Markets?

The third largest Asian economy (after Japan and China) and the twelfth largest in the world, the Indian economy is virtually a success story. A mixed economy with more of socialist features to begin with in 1947, India, today, has become home to many MNCs. Since the nineties, when India first associated herself with concepts of Liberalisation, Privatisation and Globalisation (LPG), our economy has never looked back. Having a GDP touching almost 9%, the Indian economy, in terms of growth, is perhaps one of the fastest growing. This can also be attributed to the enormous growth of the services and manufacturing industry.

Huge spurges in call centres, software industry and back-office outsourcing, combined with India’s ability to produce world-class products and goods that are available in the market for a fraction of the amount of its foreign contemporaries has favoured India and has made her a major exporter of such produces.

Due to all these factors, our booming economy, is receiving an unparalleled flow of foreign investments and robust corporate profits. Since five years, the 30-stock SENSEX has been furnishing an annual return of 40% (in Rupees), and the sectors of real estate, banking and information technology (IT) have been at the vanguard of this explosion.

But, as the saying goes, all that glitters is not gold. While the economy, as a whole, is growing, the condition of the stocks is a bit misty. However, this stands true for all the share markets of the world due to the concept of volatility. The capriciousness has increased amid rupee’s strength against the dollar and the global credit crunch hampering Indian exporters. Till date the SENSEX has lost 13%!

Nonetheless, the fund industry has meted out various options for potent US investors to invest in India. The first of the two exchange-traded funds focussing on India has been launched, with the second one in the pipeline.

The Indian Share market also has provision for Exchange Traded Funds (ETF) that holds securities and follows a specific index, and can be traded just like stocks. In addition, ETF has been designed such that its share prices are close to its underlying asset value. This entire market is now open for both PIOs – person of India origin and NRIs – non resident Indians and they can very well invest in India using properly designated NRI Accounts through various financial brokers. These financial firms offer quality NRI Services like: Demat Account, NRI Bank Account, Online Stock Trading, Indian Mutual Funds, Futures Trading and mutual fund SIPs.

Top Brokers offering such investment solutions through their NRI Services are: http://www.NriInvestIndia.com, http://www.NriInvestmentsIndia.com to name a few.

NRI Share Trading in Indian Stock Market

The Indian Stock Market is as dynamic as any other market – the difference perhaps being that the Indian market is also accredited as being the emerging economic superpower. This perhaps is the reason why many Non-resident Indians (NRI) including Persons of Indian Origin (PIO) and Overseas Citizen of India (OCI) are investing in the Indian Share Market.

Many non-residents today look towards the Indian Market for investing their money. There are many brokerage houses that help non-residents in doing so. Timesofmoney.com, nriinvestindia.com, nricapital.com etc. are just some of the better brokerage houses. These brokerage houses will carry out all the paper work on your behalf with the broker acting as your representative in India.

Investments in India can be done in a number of sectors. The first among them is the real estate sector that has emerged as the hot spot for potent investors. This is perhaps because this sector is fast growing and non-residents have the option of buying, selling and/or even renting out their property.

Next to real estate, the investors have the option of investing in Bank deposits, better known as Fixed Deposits. They can open FCNR or NRE/NRO Account for the same.

In addition, many investors, today, prefer investing in Mutual Funds, as they can diversify their interests and Mutual Funds have the least amount of susceptibility. Investments in Mutual Funds can be done on a ‘repatriable’ as well as ‘non-repatriable’ basis. You can invest as per your convenience.

Investment is also allowed in PSU Bonds and/or proprietary or partnership concern in India. Non-residents may also invest in air taxi operation and Commercial Paper issued by Indian Companies.

Also, thanks to technology, investors can now trade shares online! But before you start with your investment spree, please note that you need to have three kinds of accounts so as to make investment permissible. The first is a bank account with a Portfolio Investment Scheme (PIS) with a Designated Bank (DB). Then you need to have DMAT Account followed by a Broking/Trading Account with a broker. You need not handle all the paperwork involved. You can give a power of attorney to your broker stating him to be your representative, and voila! All your work would be done in a jiffy.

In fact, you don’t even have to come over to get your Permanent Account Number (PAN). Your broker, on your behalf, as your agent, will do that for you. PAN is required, according to Government of India rule, for any financial transaction. A typical PAN would look like ABCDE1234F. For further details on how to get a PAN Card without coming over, please contact PAN Card Assistance Brokers at:

www.nripan.com

www.pancardonline.com

Thus, thanks to the boom in technology and Indian economy emerging as an economy to reckon with, non-residents are increasingly looking towards this eastern share market to invest their hard-earned money.

What are Mutual Funds?

Mutual Funds is a term that we all here almost everyday. But what exactly is a Mutual Fund? It is what its name suggests. Mutual Fund is like a company that brings together people from different strata and walks of life and helps them all to mutually invest their funds in stocks, bonds or other securities.

Types of Mutual Funds

Irrespective of who you are, what you do and what your income is, there is bound to be a Mutual Fund that would fit your necessities. According to the last count there are more than ten thousand kinds of Mutual Funds in North America, implying that there are more Mutual Funds than there are stocks!

Before we proceed on the various kinds of Mutual Funds, we would like to inform you that all Mutual Funds are subject to market risks though the amount of risk may vary between one Mutual Fund and another. Generally, higher the return potential, higher is the risk of loss. Please remember that it is impossible to diversify away all risks.

Coming to the kinds of Mutual Funds, there are largely three kinds of Mutual Funds with each fund having a predetermined investment objective tailoring the fund’s assets, regions of investment and investment strategies. These are:

  1. Equity Funds (stocks)
  2. Fixed-income funds (bonds)
  3. Money Market Funds

Of these, Money Market Funds are the least risky; hence we will start with that and then proceed towards the more risky kinds.

Money Market Funds
The safest area to invest in, you won’t get great returns but at the same time you don’t have to worry about losing your principal. Typically, you would get returns twice of what you would earn in a conventional savings account and a little less than a certificate of deposit. The Money Market consists of short-term debt instruments, mostly Treasury Bills.

Fixed-income Funds (Bonds)
The purpose of these funds is synonymous with its name. These funds provide you with a steady income. Best option available for conservative investors and retirees, while the fund holding may appreciate in value, the investors will be guaranteed of a constant cash flow. Please remember that while it’s true that bond funds give you higher returns, as stated earlier, they also have their share of risks. Bond funds vary noticeably depending on where the investment is. To give an example, a fund specialising in high-yield junk bonds is much more risky than a fund investing in government securities. In addition, all bonds are subject to interest rate risk meaning that if the rate goes up, the value of the fund goes down.

Balanced Fund
As the name goes, so does its objective. These funds provide you with a balanced mixture of safety, income and capital appreciation. The stratagem of this fund is to invest in a combination of fixed income and equities. A similar type of fund is asset allocation fund. While the objectives of both these funds are similar, the asset allocation fund doesn’t get restricted to a specified percentage of asset class unlike the balanced funds. It is because of this that the portfolio manager is given the freedom to switch the ratio of asset classes as the economy moves through the business cycle.

Equity Funds (Stocks)
Funds invested in stocks represent the largest category of mutual funds. Long-term capital growth with income – this is the aim of these funds. However, since there are many types of equities, there are also many types of equity funds. Equity funds are classified on the basis of the size of the company invested in and the investment style of the manager.

Global/International Funds
An International Fund is one that invests only outside your home country. Global fund, on the other hand, invest globally including your home country. We do not say that these funds are more/less riskier than those of your home country. Also its difficult to classify so as the world’s economies today are inter-related. But it is quite possible that some economy is doing better than your own home country’s economy, and hence investing there would perhaps yield greater returns.

Speciality Funds
All-encompassing funds, yet they do not belong to the categories mentioned above, hence are called speciality funds. This type of mutual fund forgoes broad diversification and concentrates on a certain segment of the economy. Extremely volatile, sector funds are targeted at specific economic sectors like finance, health, technology etc. There is a possibility of big gains but be prepared for losses as well. Regional funds make it easy to concentrate on a specific region in the world. With these funds you can focus on a particular region (Latin America) or a particular country (Brazil). Socially responsible funds or ethical funds invest in companies that meet certain guidelines or beliefs. Such funds do not invest in industries like tobacco, alcoholic beverages, nuclear arms etc.

Index Funds
This type of mutual fund replicates the performance of a brad market index such as S&P 500 and Dow Jones Industrial Average (DJIA). An index fund merely replicates the market returns and benefits the investors in the form of low fees.

Now that you know how Indian Mutual Funds are classified, let us tell you how non-residents can make money from the same. There are three ways:

  1. Mutual Fund income is earned from dividends on stocks and interest on bonds, held by the mutual fund.
  2. The Mutual Fund has a capital gain if the Indian Mutual Fund sells securities that have increased in price.
  3. If Mutual Fund holding increase in price but are not sold by the fund manager, the Mutual Fund’s shares increase in price. You can then sell your Indian Mutual Fund shares for a profit.

** Note: Mutual Funds will give you a choice to either receive a cheque or reinvest your gains by buying more shares.

Mutual Funds have a lot of advantages for all you non-residents:

  • Professional Management – Managing money and professionally managing your money are two different things, and Indian Mutual Fund is the most inexpensive way of letting a manager make and monitor all your investments.
  • Diversification – By owning shares of Mutual Funds as compared to individual stocks or bonds, non-residents’ reduce risk because large Indian Mutual Funds typically own different stocks in different industries in one mutual fund itself.
  • Economies of Scale – Transaction cost for non-residents is lower because a mutual fund buys and sells large amounts of securities at a time.
  • Liquidity – Indian Mutual Fund allows your shares to be converted into cash at any time.
  • Simplicity – Non-residents can trade (buy and sell) Indian Mutual Funds online.

Mutual Fund: The Costs

Costs are the biggest problem in Mutual Funds. They eat into your cost and is the reason why most Mutual Funds have sub-par performance. What is worse is the way the industry hides costs. Some companies opine that companies get away with fees they charge because many times the investor doesn’t know what he/she is paying for. It is because of this that we, at nriinvestindia.com, feel it is important that we guide you through this.

Fees can be broken down into:

  1. Ongoing yearly fees to keep you invested in the fund
  2. Transaction fees paid when you buy or sell shares in a fund (loads)

Expense Ratio
Expense ratio or Management Expense Ratio (MER) represents the ongoing expense of a Mutual Fund. The expense ratio is composed of the following:

  • Fund Managers’ Cost – Synonym for management fee, this cost is, on an average, between 0.5% and 1% of assets. It sounds small, but the managers actually earn quite a lot with this meagre fee in %. Obvious, if the manager charges you 1% of 250 million, they get 2.5 million!
  • Administrative Cost – These include necessities like postage, record keeping, customer service, and even cappuccino machines in some cases!
  • 12B-1 Fee (common to US market) – If you invest in a mutual fund having 12B-1 fees, it actually means that you are paying for the advertisements that the mutual fund runs!

On the whole, expense ratios range between 0.2% (index funds) to 2%. You would perhaps pay more for international and/or speciality funds, as that requires more expertise.

Loads
Loads on the other hand, will look like below:

  • Front-end Loads – Simplest kinds of loads, you pay the fee when you purchase the fund. For example: if you invest $1000 in a mutual fund with a 5% front-end load, $50 will be paid for the sales charge, and $950 will be invested.
  • Back-end Loads (Deferred Sales Charge) – In such a fund you pay the back-end load if you sell a fund within a certain time frame. For example, suppose the back end load is 5%, the load is 5% if you sell it within the first year, 4% in the second year and so on. If you do not sell the mutual fund by the sixth year, you do not have to pay the load at all.

A no-load fund sells its share minus sales charge or commission. Some in the industry will tell you that load is the fee you pay the agent for choosing the right mutual fund for you. Going by this pretext, your returns WILL be higher because of the professional advice. But there is hardly any evidence showing a correlation between load funds and superior performance.

How to pick a Mutual Fund

While it’s true that Mutual Funds are the best options to go in for and have the least risk involved, it’s also as important to pick the right mutual fund that would suit your investment style.

Net Asset Value (NAV): Value of your Fund

The NAV is the fund’s assets minus liabilities, and this is the value of your Mutual Fund. NAV per share is the value of one share in the mutual fund, and is the number quoted in the newspapers. In simple terms, NAV is the price of the Mutual Fund and fluctuates everyday with change in fund holding and outstanding shares. While buying shares, you pay the NAV plus the front-end load, if any. While selling, the fund will give you NAV minus any back-end load.

Do NRIs require a PAN Card to invest in India?

As per the new SEBI ruling with accordance to the protocols set by the Income Tax Department of India, anyone who wants to invest in Indian stock markets, invest in India or get into any financial transaction in India needs a PAN – permanent account number. SEBI has made it mandatory for all kind of investors to have a PAN card irrespective of the fact whether he is a resident Indian living in India or a person of India origin (PIO), Non resident Indian (NRI) or an OCI – overseas Indian living abroad to have a pan card; provided he intends to invest in India: primarily in Indian stock markets – viz: Indian mutual funds, stocks, derivatives, bonds or who wants to carry any kind of financial transaction.

A permanent account number is a 10 digit alpha-numeric code number coming in form a standardized card shape which is issued by the IT department of India in all major cities, besides this NRIs can also apply for a Indian pan card online by going to the government website. Generally it takes 20-30 days for an NRI to get his pan card in any foreign location, and he can apply for his PAN number online these days without any major hassles where he/she can pay online to the Income tax department and apply for his unique pan number. Just to mention, one person can have only one pan card for his life, and once the permanent account number is issued the number is not changed, however if the person’s pan card is lost then he may apply for a duplicate pan card; however his pan number remains the same.

It is said that if a person does not have a pan then he may be liable for a penalty of Rs.10,000. It is not necessary to file taxes if you have a pan, you pay taxes in India only if you are generating income out of India, however it is still advised to NRIs, PIOs and OCIs to file taxes as it reflects a good credibility and image of the client. Thus is utmost necessary for an NRI also to have a pan card, and he may apply for a PAN card through his representative or any other broker who can lend such kind of PAN card assistance services and who could go ahead and help the NRI in applying for a PAN card at various NRI pan service centers in India. All in all it is very easy these days to apply for a PAN, all one has to do is download pan application or relevant pan form online, fill them up and submit the same to any one of the various PAN service centers in India.