Dreams on hold: Indian investors aren't rushing to Nasdaq yet

You could almost sense the dollar sparkle in the eyes of the Indian investor. When, in early 2004, the Reserve Bank of India (RBI) announced new guidelines that permitted resident Indians to transfer $25,000 (Rs 11,25,000 at the exchange rate prevailing then) abroad for any purpose (except the purchase of sweepstake tickets/lotteries and a few other items), the implications were clear: Indian investors could invest in stocks, bonds or real estate anywhere in the world. However, the sparkle has dulled a bit since then.

It's not as if investment instruments are not available. But anyone who wants to introduce such a new product in India requires RBI approval. So far, the central bank has granted permissions only for depository accounts, which the banks don't market aggressively because of low demand. As a result, the Indian investor is entirely on his own when it comes to making an investment decision.

Then, the $25,000 (Rs 11,00,000 at current exchange rates) ceiling is too low to excite banks and financial houses, says Abhay Aima, Country Head, Equities and Private Banking Group, HDFC Bank. "The amount is on the smaller side when we talk of really high net worth customers, and while it is a good option if you want to diversify your risks, investors should be careful before jumping into something like this," he says.

Changing game: The Indian stock market looks a better bet than the NYSE

The India growth story is being cited as another reason why investors are choosing to keep their money invested in the country. Inflows from FIIs (foreign institutional investors), which are driving the surge in the Sensex, are increasing by the day; FIIs have pumped in $759 million (Rs 3,339 crore) into Indian equities in June 2005 alone, an indication of how attractive the India story looks right now. According to Rahul Johri, Business Head (NRI Services), Standard Chartered Bank, NRIs who have the option of investing abroad are preferring to transfer their investments to India because the value of the rupee is expected to continue to gain strength against the dollar over the next year or so. Adds Bhargav Dasgupta, Head (International Banking Business), ICICI Bank: "With the rupee appreciating, an investor looking to invest abroad has to keep currency fluctuations in mind; and with the rest of the world looking at India as an investment destination, it is definitely better to remain invested here." Shorn of analystspeak, this means there are very few countries that are giving better returns than India.

Familiarity is another important factor. Unless an investor is investing through a mutual fund, he has to do his own homework before investing abroad. And if he chooses to invest in India, he will have a better idea of how the markets are behaving, and more advisory options as well. As a result, he has a better chance of making more informed decisions, and garnering better returns.

The Bright Side

With the Sensex scaling record highs (as this article was being written, the highest it reached was 7,178 during intra-day trading on June 24), it would appear naïve for an Indian investor to look outside the country. The only logical reason to do so is diversification. As an investor, it is always advisable to have some variety in your investment portfolio in order to spread your risks; and if you do your research well, you could still end up with some great investments outside India.

Right now, the safest way of going about this is to open an account with a bank that allows you to remit funds overseas. Some banks (such as BNP Paribas and Standard Chartered) have been granted permission by the RBI to launch depository accounts in India. But according to the head of one of these banks, proper regulations and guidelines need to be put in place before investors can make full use of this opportunity.

One of the things that could be done is increase the $25,000 ceiling substantially. Says Johri: "If the ceiling is raised, it would make it more attractive for the banks as well as the high net worth investors who will then look at investing through this window." The removal of restrictions on introducing new products will also help generate greater interest among banks and mutual funds, and ultimately lead to more and better products. Such a move will allow Indian investors to have greater access to relevant information and lead to more participation. At present, though, unless you are looking at diversifying your investment portfolio and are open to the risk of investing in another country, it will be advisable not to rush into anything.

Undivided We Stand

The Hindu Undivided Family (HUF) is treated as a separate entity under Income Tax laws, providing a route for you to save some taxes.

By Priyanka Sangani

WHAT IS AN HUF: Comprises two or more family members. For income tax purposes, it is considered an individual entity subject to the same tax laws as an individual. HOW YOU CREATE ONE: Use a gift given to the family to open an HUF account in any bank (in the name of the karta). HOW YOU SAVE TAXES: The income is split between family members and the HUF, so your overall tax burden is reduced. You can also invest money in the name of the HUF.

Despite the trouble he had setting up an HUF (Hindu Undivided Family) account (the bank wanted an HUF deed, although legally, none is required to set up an HUF), Bhavin Shah, 28, a Mumbai-based chartered accountant, has no regrets. Not surprising, considering the significant tax benefits that accrue from having one (see The HUF Advantage). One reason why Shah opened the account was to create a pool of common assets for the family, apart from the more obvious tax benefits. "I invest in shares through my HUF account as I can get additional tax exemption on my earnings up to Rs 1 lakh, apart from the exemptions that my wife and I are entitled to as individuals," he says.

For the record, an HUF isn't just about Hindu families; it includes Sikhs, Jains and Buddhists as well. According to Anup Shah, Partner, Pravin P. Shah & Co., an HUF comes into existence when a man gets married (not after a child is born, a common misconception). More importantly, under the Income Tax Act, 1961, an HUF constitutes an independent legal entity that can invest in its own right, file tax returns and avail tax benefits.

The last part is of interest here. For this, you first need to open a bank account in the name of your HUF; that's the only legal requirement for starting an HUF. The account can be set up through money gifted to the HUF either by a close family member or a relative or even one of the members of the HUF. "An HUF account is operated in the name of the karta, who is the head of the family," says Gautam Nayak, a chartered accountant. The money used to open the account can then be invested in any investment avenue by the karta; the subsequent earnings accrue to the HUF and not to the individual family members. This way, even if you end up paying tax on your HUF account, it works out to be less than what you would pay otherwise (as an individual), since the HUF, being a separate legal entity, can also avail of the tax exemption limit of Rs 1 lakh. Any other returns from investments you make in the name of the HUF also do not get clubbed with your individual income, thereby saving you some tax.

Then, you can transfer the income from renting out ancestral property to the HUF and save tax on that. You can also loan some money to the HUF, which it can invest, say, in a bank fixed deposit. From the second year onwards, the interest on the interest earned is taken as the income of the HUF, reducing your tax liability further. All this makes an HUF a viable tax-saving tool for those who are eligible.