Don't let inflation erode your savings

This week's situation is from Ajith Singh, an Indian finance manager of a UAE-based IT company with a monthly salary of Dh28,000. His outgoings every month total Dh12,000 and his dependents include his wife and four children.

Among his assets, he has a stalled pension fund in India, which has been dormant during the eight years he's lived in Abu Dhabi, and he has been paying around Dh1,000 a month into a cash-based bank savings plan for his children's education for the past eight years. Singh, who has just sold his family villa for Dh4 million, is now keen to invest his cash immediately so as not to lose out through inflation. He does not want to buy property in the UAE again and would prefer to rent for two years before returning to Mumbai. He would consider buying property again in India, but would like to see what happens with the market over the next two or three years first. He would like some help investing this money wisely in a portfolio split between both high risk/high return and low risk/low return elements.

The most pressing financial consideration for you is the Dh4 million in cash proceeds from the sale of the villa, which is being eroded by inflation as it lies stagnant in your bank account. This needs to be invested for the short to medium term. As you are looking to invest in a balance of high- and low-risk assets, this will require diversification across a number of asset classes.

As a non-resident Indian you can buy land or property in India whilst not living there. However, once you move back, you will become liable for income tax on your worldwide income. Indian mutual funds held for at least one year are free of capital gains tax if classed as an equity fund, which roughly means it is a fund that has 65 per cent of its assets in domestic companies; other equity funds come with a 10-20 per cent tax charge. You should consider taking out an Indian systematic investment plan, which would bring some diversification, but ideally you need to start investing around the world and not only in rupees.

The only problem might be the relatively short term of your investment if you are looking to purchase property again, as it can be difficult to invest in mutual funds for only two years. However, the deVere Fund Platform, launched recently in the Middle East, giving access to more than 5,000 funds from more than 200 fund houses might be the best option to explore.

There should be enough disposable income left over each month to consider increasing the monthly educational savings for your children. As your children are quite young, you should think about investing the education plan into equities, rather than as cash as this will enable your money to have the greatest potential for growth. You are doing absolutely the right thing saving for your children's future, but this simple switch could make life much easier down the line.

Independent Financial Adviser Gavin Smith analyses readers' portfolios for Emirates Business. He is Area Manager of consultants PIC, a member of the deVere Group of companies. Write to him at money@business24-7.ae

 

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