India is one of the world’s fastest growing economies and has a vibrant business culture. But with growth comes inflation, for every emerging market, the levels of which can be contained but not avoided. Safety, capital gain and consistent returns are among the primary goals of any Indian investor. The question arises: are your feedback “real”?
It is important to understand the difference between nominal returns and actual returns.
Nominal returns are a percentage offered by your banker, investment firm or the market, in your own currency. Real returns, on the other hand, are the “real” value of your returns after taking into account factors such as inflation and currency depreciation.
Imagine, you have deposited Rs 1000 today with your banker and your banker offers you an interest rate of 6%. You recover Rs 1060 in a year. At the same time, imagine that the price per kg of basic consumable is Rs 50 today. If the same consumable exceeded Rs 53.5 per kg in a year, your interest rate would be 0%. In this example, your banker offered a nominal interest rate of 6% while your actual interest rate was 0% or negative. As another example, let’s look at Venezuela where bank deposit rates are above 55%. But, with inflation above 400%, would it be wise to invest?
(Graphic source: https://www.macrotrends.net/countries/IND/india/inflation-rate-cpi
Data source: https://datatopics.worldbank.org/world-development-indicators)
The economic volatility in the current environment has created concerns in the minds of Indian investors who are unable to envision the real ROE (return on equity) of their investments. Given the recently announced inflation rates of around 7% and bank deposits of around 6%, Indian depositors are likely to end up with negative real returns on their rupee deposits, just like their Western counterparts whose banks are offering negative or close to zero interest rates on $, € or £ deposits. Likewise, investing in rupee equity funds that earn 10-12% IRR (internal rate of return) is also likely to lead to real returns below 5% once inflation and the depreciation of the market. rupee are taken into account.
Since negative or near zero interest rates in the West have been rife for many years, investors have shifted from bank deposits to investing in listed securities, REITs and unlisted AIFs to flaunt their risk profile. -performance.
Real estate is a key sector for investment in India. Over the past decade, the best performing cities have included Lucknow with an IRR of 16.1% per year. Kolkata at 13.3%, Delhi at 12.2% and Mumbai at 11.2%. Jaipur was at the bottom with an IRR of 6.1% per year. For homeowners, this would always be a matter of concern when comparing “value”: what Rs 100 could buy in 2010 versus what the same Rs 100 can buy today?
However, the picture is quite different for foreign investors who are able to negotiate IRRs between their teens and their early twenties with Indian borrowers and leading real estate developers, taking into account their cost. hedge against the depreciation of the rupee which is directly correlated with inflation. These deals are not available to Indian retail investors because their note size is smaller, which then requires them to invest through mutual funds or AIFs in India, which in turn compete with foreign investors. generally offering lower IRR thresholds.
All of the above combined creates an atmosphere where your money devalues faster than you might think. Low interest rates coupled with rising inflation are driving investors to seek substitutes in India and abroad. Some have started investing in start-ups while others have started betting on Forex derivatives. Diversifying part of your investment portfolio into opportunities denominated in € or $ is one of the many practical and sustainable ways to preserve your wealth and earn “real” passive income.
What are Alternative Investment Funds (AIFs)?
AIFs are regulated investment vehicles designed to fund opportunities in real estate, venture capital, infrastructure and many other sectors. Real estate AIFs are the most popular because the underlying asset is a physical asset itself which provides basic convenience to investors.
Like mutual funds, AIFs can be equity, mezzanine, or debt strategies and have the potential to produce higher economic returns due to off-market opportunities otherwise inaccessible to investors in general.
The success of AIFs at all levels proves that resilient investors can make their money work for them. Long-term investors are increasingly looking to foreign funds to cover their local investments. This non-traditional investment is now becoming mainstream for investors to participate in asset classes that they would otherwise not have access to.
Unlike mutual funds which are a preferred investment vehicle for Indian investors of all sizes, AIFs are more suited to knowledgeable and professional investors. It is important to understand the fund specifications before deciding where to invest. Risk-reward analysis is a good place to start screening potential investments.
How can Indians benefit from investing in European AIFs?
The IRRs for real estate in European markets (like India) are in the low to mid teens, but they are denominated in € (euros). This is a remarkably simple situation where 10% on an investment denominated in € will “really return” more value than 10% in return denominated in ₹.
Thus, Indian investors, mostly non-residents or HNW residents, are now increasingly diversifying part of their investments into instruments denominated in € and in $. The RBI’s Liberalized Remittance Scheme (LRS) allows investors to invest up to $ 250,000 annually abroad without any prior central bank approval.
As Europe becomes a preferred trading partner for Indian companies and a superior choice for immigration, investing in their markets has become a natural progression. Europe has a free market economy with transparent investment policies, a strong regulatory framework and attractive real returns. Despite the global upheavals of 2020, the real estate market has remained stable in most EU countries, fueled by the injection of liquidity by the central bank, generating either minimal damage or sustained returns for investors around the world. whole.
Some European AIFs offer more benefits than just real returns on your money. These investments can also qualify the residency rights of your family in the beneficiary country through the so-called Golden Visa programs. Countries like Portugal, Greece and Cyprus welcome investors through several of these programs which allow the investor and his family to acquire their residence and possibly a European passport, if they wish. Other benefits include tax breaks, arbitration gains on repatriation, access to education, health care, and more. that make investing in Europe for Indian investors more lucrative than ever.
The author, Ashish Saraff, is Founder and CEO of Aretha Capital Partners. Opinions expressed are personal