Where do I Invest? – I

This was yet another interesting session of our seventh CA Friends meet on 29th January 2020. We chose the topic “Personal Investments”, on demand from most CAs who (supposedly) mint money, but sitting outside India, aren’t really aware of the various investment options available to us. The following options were discussed.

1. PRE-INVESTMENT TIPS

For most of us, making a choice of investment is confusing, as it is based on future returns, which is unpredictable. We are unsure of how much of our money do we invest in the first place, the returns we will earn (unless they are fixed income investments), what is the kind of risk involved and whether it will result in an appreciation (in case of equities and real estate). So how do we ensure that we are ready for investing? Let us take it step-wise:

a) Clarity of thought, that no matter where the money is invested, you have the conviction to hold on to the investment through unexpected downturns.

b) Ready with safety nets to overcome any potential risks

c) Decide  between investing options by drawing an investment map that charts out various points relating to the investment, timelines involved, currencies involved, the stops and the milestones.

d) Know where you are today by keeping a track of your income and expenses. Make a budget and stick to it. Keep a track either on a daily or a weekly basis, analyze and compare your budget to the actual and re-strategize wherever required to suit your original investment idea (say like cutting down on the weekly coffee outings and ritual weekend dinners).

e) Draw up your net worth statement. Keep in mind the net worth of wealth that you want to retire with and the place of retirement. Place of retirement will impact your budget as it involves currency as well in case you decide to settle down somewhere outside India.

f) Calculate the optimal amount required for retirement by comparing income to investment, which should ideally be greater than 1. The amount required for investment is equal to approximately 25 times your current annual expenses minus 4% withdrawal rate from your portfolio per annum for 30 years (also called the 25x Rule to Early Retirement)

g) Consider major future expenses and keep those apart, such as emergency fund, capital funds, kids’ education and wedding expenses, etc.

h) Keep safety nets handy such as insurance policies, liquid funds averaging 6 months. Keep your online account passwords safe, and ensure that at least one person in the family is aware of your accounts and passwords and are able to access it in case of emergency.

i) Be aware of local rules and regulations, like Guardianship, Sharia Law and Inheritance laws. Make a will, so your family is not affected by local Sharia Law in case of inheritance.

j) In case you need to leave the country in an emergency situation, make a plan as to how the investments will travel with you, say by having at least one offshore account. You should be able to withdraw your investments in case you know that you will not be returning to the country (God forbid such a situation arises!).

k) Hire a financial advisor as they are the best guides. But, don’t forget to do your homework.

l) Check the exit cost for any investment, so that in the end, you don’t end up with a loss because a particular investment demands heavy exit cost.

2. EQUITIES – INDIA

There seems to be a lot of negative sentiment in the Indian Markets, with a slump in GDP ratio, seemingly low business output and struggling businesses. However, the NIFTY and SENSEX are at an all time high. How is that possible? The reason is, although the current scenario isn’t too good, businesses and investors are expecting a recovery in the future. The system at present is being cleaned up with more businesses being declared bankrupt and attempts made to recover the money, major reforms such as implementation of GST, Demonetization, black money recovery, etc which is leading to liquidity issues in the economy. Steps are being taken to improve liquidity while the money is recovered, through taxation reforms, privatization, mergers, etc.

The funda of equity investors is to Buy low and Sell high.  Now is a good time to invest, as most companies have reasonable valuation, particularly in emerging markets where the valuations are comparatively high to global peers. The next decade belongs to India, with a general positive outlook.

There are several ways to invest:

• Buy shares directly, however ensure you have a clear understanding of the industry before investing
• Find an asset manager to help you with the investment options, so you don’t have to track it in your busy schedule

There are three categories of investments to choose from :

1. Retail – If your corpus is less than Rs. 50 lakh, (most of us may fall under this category) you can opt for retail investments, such as Mutual Funds. These are small case investments giving approximately 15% returns.
2. PMS – If you have a corpus of more than Rs. 50 lakh and upto Rs. 3 crore, you can opt to work with PMS
3. Fund Managers such as Better Fund Manager, ASK, Alchemi, Enam which provide for returns greater than 30%.

3. UAE & INTERNATIONAL MARKETS

A key piece of advice that every speaker gave is not put all your eggs in one basket. It is a very good practice to diversify geographically and across currencies. Since the market is unpredictable, timing of investments also cannot be predicted accurately.

Hence for us Indians it makes sense to invest in Global Equities. However it is challenging as it is not practical to do research across so many countries all by ourselves. Actively managed mutual funds charge high fees but very few of them are able to consistently beat the index.

Then we have passive investing, which are low cost investments – exchange traded funds such as VWRD Vanguard FTSE – All World UCITS ETF. This ETF tracks the FTSE World Index. It invests in around 3,400 companies and has been giving a return of $10.78% per year in Dollar Terms since inception. In 2019, the returns were close to 27%. There is another version of the same ETF called VWRA, this reinvests the dividends so it is preferable. There are cyber-security ETFs which invest in Tech Stocks having high returns and are expected to grow in the near future such as USPY. Although it is more volatile, it has the potential to offer higher returns.

USA registered funds are subject to 30% withholding tax on dividends, the funds mentioned are registered in Ireland and subject to only 15% withholding tax.  Swissquote Bank, Internaxx or Saxobank, are good banks to buy funds through, with a US broker like Interactive Brokers there is risk of inheritance tax on cash balance above USD 60,000.

It is better not to invest through products or platforms offered by insurance companies because they charge huge fees and exit penalties.

The crux here is, AED is pegged to USD, and it couldn’t get better than this. We should make the most of the opportunity we have to invest in global equities but this should be for long term only and not for trading or speculation.

4. GOLD

In Dubai, all that glitters is definitely gold, and we Indians love gold! Our grandparents (and some of our parents) believed in investing in gold for our future security. Many still believe in investing in physical gold. Countries are building their reserves using the yellow metal, which is why demand is generally up. Gold amplifies returns in the future. A simple example is, when parents were young, gold prices per 10 grams were approximately Rs. 400. When we were kids, it was approximately Rs. 4000 and now, it is close to Rs. 40,000. It may touch six digits in the future, you never know!

It is a good investment to make, particularly when you have already put your money in shares, to serve as a buffer when markets go down. Interest rates and price of gold are related – when Interest rates rise, it has a negative impact on gold prices. It is wise to invest a smaller proportion, say 10% of total assets into this yellow metal.

Gold investments can be categorized into:

• Physical Gold, including bullion bars – The advantage, they stay with you.
• Short Term Commodity – This is like any other commodity such as oil, which can be traded on DGCX or can be physically traded as bullions. There is an online platform that allows you to trade, but exercise caution as it also has a counter party risk.

Gold trading can get tricky, due to which we may end up making less than optimal profits. Buy when prices are low, set a target price at which you would like to sell, and sell it when it reaches the target. Many of us get tempted to hold on a little further, hoping that prices will rise further, but sometimes, it starts falling, and we lose out on gains.

In case you decide to opt for buying and selling jewelry instead of bullion, keep in mind that making charges can eat up profits.

UAE or India – which is a better bet to buy? Gold looks good to buy both in India and in UAE. If you buy in UAE, the heavy customs duty charged in India could ultimately lead to a loss. So, check the rates and the cost involved before buying.

5. REAL ESTATE – THE REAL DEAL!

How much investment is enough? This is an answer you cannot estimate to the T, thanks to a spoiler called inflation. Real estate is one sector that tackles the inflation and appreciates in the long run, so it is wise to put this on top of the portfolio list. This also acts as a safety net for the next generation.

We have two options – investing in UAE and investing in India.

Investing in India

India has huge housing demand thanks to the population. However, affordability takes a backseat, especially in metro cities. The real estate sector, however is looking to recovery with implementation of RERA and re-building customer confidence.

How to approach investment in India?

1. Do your due diligence – The first thing to consider is location. Decide based on your own experience as well as experience of family members, friends and colleagues who have already invested.

2. Under construction or completed projects? It is a natural instinct to opt for under construction projects, as the life of the asset will be longer and we don’t have to deal with wear and tear immediately. In this case, check the credibility of the developer and financing option. Opt for a project which you are comfortable investing in and a layout which will suit your requirement.

3. Return on investment – Stay invested in the property for 15-20 years to reap gains.

4. Renting out – Millennials do not like the idea of investing in real estate, so the demand for rentals has increased.  While selecting a tenant, do your due diligence and consult a lawyer to get your documents ready. Register your leasing contract with the revenue authority. This contract protects both landlords and tenants.

There are 2 types of rental contracts in India, one being a lease agreement that lasts for a minimum of 12 months. This is governed under Rent Control Laws put up by the State government and the other is a lease and license agreement of up to 11 months which doesn’t fall under the Rent Control Laws. Check the statewise laws relating to tenancy. Do not forget to include the penal clause which can be applied in case the tenant refuses to vacate on expiry of his term.

Ensure your property tax and utility bills are paid on time, and in case your property is rented, you can install CCTV to monitor the activity from here.

Investing in UAE

Many of us have the question, is this a right time to buy? The answer is YES! Let’s consider the W’s involving the decision:

1. Why should I invest?
   An advantage of buying a property in the UAE is the assurance of continuous cash flow by renting it out. Another advantage is the option of using “Other People’s Money” (OPM) to fund the property. UAE law allows funding of 75% through mortgage and 25% through own funds. Interest rates are low, ranging between 3.9% – 4.0%. You can make a profit by renting it out, as the current market assures a return of 5%-6% after reducing maintenance and other charges. So there is a leverage of approximately 2% if invested in the right locality!
2. Where should I buy?
   Dubai has two investment options – Freehold and Leasehold. Leasehold is prominent in most parts of old Dubai, where you can lease the property for 99 years. Freehold property is available in newer communities, and the property is all yours to own.
3. What should I buy?
   A perennial confusion is, should I go for a gated community, or a non-gated one? Should I opt for a villa or an apartment, when the prices are close to the same? What are the amenities I am looking for – pool, parks, proximity to schools, metro station, public transport? Buy one that suits the best of your priorities.
   Apart from these considerations, check the service charges for the community or building you are investing in. Charges in communities like JLT, Dubai Marina, JBR, etc are very high at about 15%, while other communities can be as low as 3%-4%.
   If you decide to buy a second hand property, consider additional factors like why is the person selling his property, who will be your new neighbours, etc. Exercise caution while investing here, since being Expats, uncertainty always looms over us. Decide how you would like to manage your property in case you leave the country in future and decide to retain the investment.
4. When should I buy?
   The best time to buy is to buy when you are ready. Currently, the markets are favourable to buyers. Many of the new projects are being sold at cost to the developer. Follow real estate trends. It tends to remain flat after it reaches a low and then slowly starts moving up. this is the best time to buy. Similarly, it will touch all time highs and remain flat for sometime, after which the trend moves downwards. this is the best time to sell. In UAE, the time horizon is 2-3 months while on a decline while 3-4 months to show an upward trend. In India, the same is 4 months and 6 months on an average respectively. This strategy helps to maximize ROI.
5. Whom do I approach?
   Two popular developers in UAE are Emaar and Nakheel and there are a others like Akoya. Before investing, check the RERA website for listed projects, the credibility of developers and the list of projects cancelled by RERA. Go through property websites like propertyfinder.ae and propertymonitor.ae to get listing prices and check with your broker for the best price before making a decision.

This superhit session was Part-I of the investment session. Next month, we will have Part -II, covering various other forms like Bonds, ETFs, etc by our personal finance experts.

– Anuradha Ramani

Contributors

1. Pre-Investment Tips and Checklist – Anushree
2. Equity – India – Amit
3. Equity – Rest of the World – Jeet Bhatia & Deepti
4. Commodity – Gold – Ankit & Rajiv
5. Real Estate – Tahera & Ujwala