Investment options for NRIs in legal, insolvency and debt asset classes

India is among the few nations which have been projected as one of the world’s upcoming economic powerhouses. As per a PwC report, India is expected to be the second-largest economy in the world by 2050. This implies that investing in India stands as a lucrative option for investors. Post-1991, India has seen tremendous development and growth in its economy over the past two decades, which results in the attraction of Foreign Direct Investment (FDI). This trend has attracted NRIs as they find it a feasible place to invest and make profits. There are overall 18 million NRIs living outside India, as per the latest reports by the United Nations. As an NRI, you can participate in some of the investment options available in India depending on your risk appetite and expected returns.

For decades, investors relied on the so-called 60/40 portfolio—a mix of 60% stocks and 40% bonds, or something close to it—to generate enough stable growth and steady income to meet their financial goals. It didn’t disappoint, producing a total return of about 9% a year on an average.

In times of current turmoil, a traditional “60/40” allocation to equities and bonds may no longer be enough to meet long-term investment goals. With inflation surging and interest rates on the rise, it becomes extremely important for investors to reconsider their asset allocation strategy. That’s because stocks and bonds tend to fall in concert in a high-inflation environment, leaving no place to hide. It is said that high and rising inflation acts as kryptonite for traditional asset classes.

Adding alternative investments is one way to lessen or counter the blow. Alternatives, or alts, have the potential to deliver income and excess returns, or alpha. An alternative investment is an all-encompassing term that generally refers to any investment that is not considered part of a traditional asset class such as cash, stocks, and bonds. While this leaves a substantial universe of options, some of the largest categories of alternative investments include hedge funds, private equity, private credit, real estate, and structured products. Each of these categories is as diverse as they are broad and have its own unique characteristics and features, as well as risk and return objectives.

Alternative investments have moved from the periphery of the global investment landscape into the mainstream. In just 15 years, alts have grown from 6% to 12% or $13.4 trillion of the global market in 2018, and they are expected to grow between 18% and 24% by 2025. This rapid growth has been driven by institutional investors such as pension funds and endowments seeking diversification and return opportunities, as well as high-net-worth individuals. Despite this, many investors remain largely unfamiliar with alts, and therefore may not effectively utilize them as part of a well-diversified portfolio.

Alternatives generally access differentiated drivers of returns and generate diverse exposures to risks. This can lead to their key roles within a portfolio – to potentially diversify the risk (hedge funds) of a portfolio due to their less-than-perfect correlation to traditional investments, and their potential to achieve high returns (private equity, including venture capital). Additionally, since they invest across a broader universe of asset classes, some alternatives may be able to generate a higher level of income (private credit and structured products) with lower sensitivity to interest rates. By including a variety of alternative investments within a portfolio, it may be possible to reduce risk without a proportionate reduction in expected return.

Investing in a brand-new alternative asset class like Interim Finance is also something that NRIs can look forward to in India. Indian companies like LegalPay are modernizing investor portfolios by becoming a trusted destination to access non-market linked income-generating structured opportunities in the insolvency, legal, and debt markets.

Let us explore the 3 best investment options in India that can generate enough stable growth and steady income for NRIs to meet their long-term financial goals:

a) Litigation Finance: Litigation finance (also called litigation funding) is the practice where a third party unrelated to the lawsuit provides capital to a plaintiff involved in litigation in return for a portion of any financial recovery from the lawsuit. It unlocks the value of legal claims by providing capital to plaintiffs before their cases are resolved. Investors contribute amounts in an SPV (special purpose vehicle) that further invests in various types of underlying investments based on the pre-agreed thesis.

b) Interim Finance: Interim Finance is offered to companies under insolvency, where Resolution Professionals need funding solutions to meet exigencies and protect the assets of the company. It is a super senior, short-term, and asset-backed lending product that generates 20% IRRs with a monthly payout structure.

c) Bonds: These are debt instruments that pay off a borrower’s debt to a corporation or government. If a company wants to grow its business and operations, they require money. One way to do that is by raising debt or issuing bonds. Bonds are referred to as fixed-income security as they have regular fixed interest payments, and the principal is paid back at maturity. Today there are platforms which work with NBFCs to bring secured bonds that are listed on their platform.

For NRIs, it is critical to know what kind of accounts they should have to begin investing. Many don’t realize that using their savings account is illegal once they move out of the country. During such situations, it is crucial to convert savings bank account into an NRE or NRO account. An NRE account enables NRIs to seamlessly withdraw and deposit money in the currency of the country they have moved to and the Indian currency. On the other hand, an NRO account is only partially repatriable. This implies one can only partially withdraw money in a foreign country. It also only allows deposits of the Indian currency. Though NRIs can invest in the above-mentioned asset classes, however, at this time due to different compliance obligations from RBI, investments can only be done via a Non-Resident Ordinary (NRO) account.

As an investor, your investment options are entirely dependent on the quantity of capital you have, the amount you can invest, and your risk appetite. Because an investor’s cash may be restricted, they should consider all potential possibilities before committing to one. Meanwhile, an investor can seek advice from a professional investment advisor on which options are the best to invest in. Happy Investing!

(By Kundan Shahi, Founder & CEO, LegalPay)

Disclaimer: These are the personal views of the author. Readers are advised to consult their financial planner before making any investment.