ETMarkets NRI Talk | Alternatives can account for up to 20% of an NRI's India allocation: Shiv Gupta

As more NRIs look to diversify their India portfolios beyond traditional equities and fixed income, alternative investments are increasingly finding a place in long-term wealth creation strategies.

From portfolio management services (PMS) and alternative investment funds (AIFs) to private credit, these asset classes offer the potential to enhance risk-adjusted returns, albeit with higher risk and lower liquidity.

In an exclusive conversation with Kshitij Anand of ETMarkets for NRI Talk series, Shiv Gupta, Founder & CEO of Sanctum Wealth, explains why sophisticated investors can allocate 10–20% of their India portfolio to alternatives, how NRIs should think about asset allocation across equities, debt, gold and real estate, and why India should be viewed as a strategic component of a global portfolio rather than an emotional allocation.


He also shares his views on FCNR(B) deposits, Indian bonds, tax planning, sector preferences and the biggest investment mistakes NRIs should avoid. Edited Excerpts –

Q) Has sentiment changed recently towards India, especially after the domestic market failed to generate substantial returns over the past two years?
A) Investors have certainly become more discerning after two years of modest equity returns and rupee depreciation, especially when many international markets have delivered much stronger returns. To an extent, the distinction between a strong economy and an attractively priced stock market has become sharper.

Having said that, we should recognise that from CY21-24, India was a clear outperformer versus most global markets, supported by strong earnings visibility, macro stability, and strong domestic flows, and its performance over a longer time scale remains impressive

Looking ahead, India's long-term structural story largely remains in place, though returns from here are likely to be driven more by earnings growth than by a re-rating of valuations with sector and stock selection becoming increasingly important.

Q) The RBI has relaxed norms to attract FCNR(B) deposits. Do you expect this move to materially increase foreign currency inflows into India over the next 12 months?
A) Yes, and the early response has been strong. RBI data and industry estimates suggest that within two months of the swap window opening, banks had mobilised nearly US$32bn, largely through FCNR (B) deposits. That already approaches the scale of the 2013 programme, which raised around US$34bn across its swap windows.

It’s worth noting that FPIs have also bought US$7bn worth of Indian debt since RBI’s announcement.

These are interest-sensitive rather than permanent flows, but they strengthen foreign-exchange liquidity and give the RBI greater flexibility in managing the currency.

Read Also: ETMarkets NRI Talk | RBI's FCNR(B) reforms could bring in over $20 billion of foreign inflows: Keyur Majmudar

Q) At 7.50% p.a., how attractive are USD FCNR(B) deposits compared with similar fixed-income options available in the US, Middle East and other key NRI markets?
A) A 7.5% dollar return is very attractive for a bank deposit by global standards. It offers a meaningful yield pick-up of more than three percentage points over comparable US bank deposits, reflecting both the current incentive to attract capital and the higher risk premium available in Indian banking.

Sophisticated investors can further enhance returns by borrowing against the deposit, although this introduces leverage risk and is suitable only for investors who fully understand the structure.

Investors should also consider the credit quality of the issuing bank, liquidity, tenure and taxation in their country of residence before making an allocation.

Q) Which sectors in India look most attractive for NRI investors over the next 5–10 years?
A) Our sector preferences are no different for NRIs than for domestic investors.

We are positive on lenders and capital-market businesses, supported by healthy credit growth, signs that pressure on net interest margins may be easing, and reasonable valuations. We also like digital consumer and platform businesses that are geared to domestic demand and contract research and manufacturing services within Pharma.

IT services could be an interesting contrarian opportunity after significant declines, although the impact of AI and the pace of global demand recovery bear watching.

Defence, energy and capital goods remain compelling long-term themes, but valuations in parts of these sectors have become rich, making stock selection increasingly important.

Q) With global interest rates evolving, do Indian bonds offer attractive opportunities for NRIs?
A) Yes, but with two caveats. Traditional fixed-income products are relatively tax inefficient compared with equity-oriented investments, and currency movements can materially affect returns for investors measuring wealth in dollars.

For higher-tax investors, arbitrage funds can offer a more tax-efficient route to debt-like returns. We also see attractive opportunities in diversified performing-credit strategies, where investors can earn low- to mid-teen returns by accepting lower liquidity and higher credit risk.

However, given the expertise required to originate, underwrite and manage these investments, the asset class is generally best accessed through well-managed funds rather than direct exposures.

Q) Can Indian fixed-income products become a reliable source of passive income for NRIs? If yes, how?
A) Yes, provided the focus is on after-tax, risk-adjusted income rather than the headline coupon.

A diversified allocation across high-quality bonds, deposits, target-maturity funds and arbitrage funds can provide stable cash flows. For investors seeking higher income and comfortable with greater risk, professionally managed structured-credit funds can further enhance yields, provided the exposure is well diversified.

The right mix ultimately depends on the investor's tax residency, income requirements, currency exposure and liquidity needs.

Q) Does Indian real estate still deserve a place in an NRI portfolio, or have financial assets become more attractive?
A) Indian real estate still has a role, but it should no longer be a default allocation for NRIs. Direct property makes sense where there is a genuine end-use, a retirement plan or real conviction in a particular micro-market or real estate subcategory. Otherwise, financial assets generally offer superior liquidity, transparency, diversification and ease of succession.

For those who want property exposure without the burdens of direct ownership, REITs can be a convenient alternative.

Q) How should NRIs think about India in their global asset allocation today, and what percentage of an NRI's overall portfolio should ideally be allocated to Indian assets?
A) India should be viewed as an important component of a global portfolio, not as a separate emotional allocation.

For NRIs permanently settled overseas with predominantly foreign-currency liabilities, an allocation of around 10-20% to Indian assets may be appropriate. For those planning to return to India, or with significant future rupee liabilities, that allocation could rise to 25-40%, depending on those future liabilities.

The right allocation ultimately depends on where future spending will occur, the currency of liabilities and existing exposure through business or real estate.

Q) What are the biggest tax misconceptions NRIs have when investing in India?
A) A common misconception is that Indian investment income is tax-free for NRIs, which is not the case.

Many investors also assume that tax deducted at source is their final liability, whereas they may still need to file returns or claim refunds. Another common misunderstanding is that all bank interest is taxed alike, whereas NRE and FCNR(B) deposits can be treated differently from NRO deposits.

Most importantly, NRIs often overlook taxation in their country of residence, when investment decisions should rest on post-tax returns across both jurisdictions.

Q) What role do Double Taxation Avoidance Agreements (DTAAs) play in investment decisions?
A) DTAAs help ensure the same income is not taxed twice and can materially improve after-tax returns. Depending on the treaty, investors may benefit from lower withholding taxes in India or foreign tax credits in their country of residence.

Investors often overlook treaty benefits when structuring their investments, which can shape the choice of vehicle, account structure and holding strategy.

Q) If an NRI has ₹5 crore to invest in India today, how would you allocate it?
A) For an investor with a 5-7 year horizon and a balanced growth objective:

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The precise allocation should always be considered alongside the investor's global portfolio rather than in isolation.

Q) What role can alternatives such as PMS, AIFs and private credit play in an NRI's portfolio?
A) Alternatives can be a valuable complement to a traditional equity and bond portfolio to enhance risk-adjusted returns.

PMS strategies provide access to differentiated, thematic and concentrated equity portfolios, which are often customised, while AIFs offer exposure to private equity, venture capital and private credit, all of which have the potential to generate higher returns than public markets, albeit with higher risk and lower liquidity.

These strategies require careful manager selection and are best accessed through experienced institutions with strong diligence standards and portfolio diversification. For sophisticated investors, alternatives can comfortably represent 10–20% of an India allocation, complementing a well-diversified core portfolio.

(Disclaimer: Recommendations, suggestions, views, and opinions given by experts are their own. These do not represent the views of the Economic Times)