Liberalised remittance scheme is a big opportunity for IFAs

George Mitra, Co-founder and CEO, Fintso, on why advisers should diversify client investments outside India.
By Guest |  01-09-20 | 
 
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Liberalized Remittance Scheme (LRS) allows individuals to send money outside India (up to $250,000 each year) for various purposes such as education, travel and investments.

In FY20, $18.7 bn was remitted under this scheme, of which only 6% was in investments (deposits, debt, equity, and property) and 92% was for travel (37%), studies (27%), relatives (18%), and gifts (10%). (Source: RBI)

This clearly shows that a) there has been very limited usage to diversify financial assets, and b) there has been limited usage by the vast majority of people, especially retail and affluent segments.

This is further highlighted by the remittance data of April 2020. There has been a drastic fall in the total remittance – which is of course a direct reflection of COVID-19 on non-investment remittances. But most revealing is that while the investment data has dropped, as a percentage, it is 17.6% - i.e. 3X of what it was for FY20.

As always, it seems that ‘smart money’ continues to use all the tools available to optimize returns – seeking pockets of value that have arisen due to the COVID-19 related disruptions. When you add to this the risk diversification it allows, it makes a lot of sense.

Take a look at the charts below:

Growth of $100 invested in NYSE FANG+ and Nifty 50 indices

The above graph clearly shows the following:

  •   There have been substantial opportunities to grow wealth by investing offshore
  •   Markets are not completely correlated, i.e. everything does not go up and down together
  •   Given how ubiquitous Facebook, Instagram, Apple, and Microsoft are, it is surprising that more people have not used this route to make investments into brands that they know well, and which they know are creating value.

This can be attributed to two factors – inadequate knowledge about LRS, and more importantly, and, at least till recently, the inability to execute on them seamlessly, at least not for people who wanted to put a small amount as part of their overall portfolio.

Both these aspects – the availability of advice, and seamless execution – are set to see a sea change.

The first is from growing investor demand – as people realise the importance (opportunity and diversification), they would actively seek avenues, which gives an opportunity, and hence the incentive, for advisers, to upgrade their knowledge and skill levels to be able to do this.

The second is due to fintech companies, which would allow seamless execution for smaller amounts, thus being able to address the larger populace. These innovations, from digital onboarding, to fractional investing, allows advisers to let their clients invest small amounts.

Think of this as the SIP revolution that happened in equity mutual fund. That movement, which allowed investors to build up their portfolio in an efficient manner through monthly tranches, is today one of the biggest contributors to domestic equity markets, consistently above $1 bn every month, even in the last couple of months despite the COVID-19 related lockdowns.

Educating advisers, and enabling them to do this, can potentially allow retail and affluent investors, especially first-time investors, to build up a position through a similar route.

In the current volatile situation, we predict that investments through LRS transactions might increase substantially, both in terms of absolute volume and as a proportion of the overall LRS remittances.

With the pandemic showing no sign of abating in India, and with the long-term economic impact yet unknown, investors may look to mitigate the risk by investing capital in mature markets abroad.

In today’s situation, as COVID-19 cases breach the six-lakh mark, Indian investors will be looking for investment options outside the country to spread their risk. Given the volatility that the Indian markets have seen – both in equity and credit defaults – a diversified portfolio, with local investments and investment in mature markets, would buffer Indian investors from domestic shocks.

In conclusion, the virtual cycle of recognition to fulfilment to further education will influence this trend and we expect to see investments as share of overall LRS remittances to continue to rise.

We see the composition of LRS remittances on a whole set to change this year, with a greater emphasis on investment, as opposed to expenses like travel. Indian investors will be looking for ways to secure their assets in the long term. LRS provides such a route, shielding their investments to a certain extent from volatile domestic market conditions.

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