By Rahul Bhutoria
The most basic tenet of a pragmatic investing approach is diversification across asset classes, currencies, and geographies. High net-worth individuals (HNIs) prudently have been using debt funds, Market Linked Debentures (MLDs), and traditional insurance policies as a part of asset allocation and that has worked well till now.
However, the recent change in taxation for Debt Funds which came into effect from 1st April 2023, has made these instruments less attractive due to them being taxed as short-term capital assets. The large segment of guaranteed returns plans from insurance companies haven’t been saved, and from 1st April 2023, any new investment in such policies ( if the annual premium is above Rs 5 lakh) will attract tax as per the income tax slab rates as and when proceeds come from these policies. Market Linked Debentures would also become obsolete as the tax arbitrage has gone.
Also Read: Parag Parikh Flexicap Fund: Will the new debt fund tax rules impact PPFCF investors?
Affluent investors have been seeking to diversify through global investments to reduce the country-specific risk and grow wealth over a period of time. Does it still makes investing sense to do so even after changes in LRS?
International investing comes with its distinct set of advantages of gaining exposure to instruments and themes not available in India, a protection against INR depreciation and a hedge against imported inflation due to India being a net importer.
Also Read: Long term capital gains in international mutual funds to be taxed as per the investor tax slab
All these points make it pertinent to have international investments in the portfolio, and some of the current favorite global investing options are:
Short Term US Treasury Bills & Money Market Fund – With US Fed increasing the interest rates aggressively and fears of recession, the short-term interest rates are pretty attractive today for an investor. 1 Year Treasury Bill is currently yielding almost 4.5% in USD terms which is a great instrument to part short term surplus.
Exposure to Truly Global Businesses – In many sectors, there are businesses that are truly global in nature, but they are not listed in India, be it Apple, Microsoft or Google. Due to their focus on market leadership through research and innovation, these companies are always likely to be on investors’ radar.
Hedge Funds & Long-Short Funds – These instruments are far more efficiently structured with respect to taxation and endeavor to generate absolute returns.
Litigation Finance – Litigation finance is a niche investing instrument that allows investors to earn from legal claims during the process of Bankruptcy in developed markets. The financing of these claims is super senior to any other claim, providing an opportunity to earn attractive returns.
Private equity – The private equity is a well-known and growing investment option in India. The offshore private equity can access fund managers with longer track record and the ability to access global opportunities.
Life Settlement Funds – These are specialized funds that trade in Life Insurance policies, have no coupling at all with how equity markets are behaving and have possibility of generating 10%-12% annual returns over medium term with very low volatility.
India is currently going through a transformation and hence there will be immense opportunities for investors, however, transformation brings temporary chaos and changes in regulations along with geopolitical risks. Hence it would be paramount to have global exposure in one’s portfolio according to asset allocation.
(Author is Director and Founder, Valtrust – A Bespoke Multi-Family office)