NRI Investment In Mutual Funds- Indepth Guide

Mutual funds have become a substantial investment to diversify your portfolio. Everyone wants to have some part of their wealth invested in mutual funds. Despite not being residents of India, NRI’s have the liberty to invest in mutual funds. NRI’s often prefer to invest in mutual funds in India. This is because they often have family in India who is dependent on them. Thus, choosing to invest in India is often considered a smart move.

Earlier their only investment options were real estate and bank deposit. But now, mutual funds have become a prevalent option. RBI’s approval is not needed when NRIs invest in mutual funds. This makes mutual funds an excellent option for NRIs.

This article brings you all the information on how NRIs invest in mutual funds in India.

Rules And Regulations For NRI Investors In Mutual Funds

Even though RBI’s interference is not required, some rules are set in place. All they need to do is adhere to the Foreign Exchange Management Act (FEMA). It is essential to understand the given definition of NRI before posing as one.

FEMA 1999 Describes An NRI As-

• A person residing in another country who is either an Indian citizen or a person of Indian origin (PIO).
• A person staying in India for 182 days or more during one financial year. This also includes people staying in India for 365 days and more for 4 financial years.
• A person deputed overseas for more than 180 days or 180 days.

Benefits Of Mutual Funds For An NRI –

1. Mutual funds are very flexible. Its various features make it easy to customize it as per your likings and needs.

2. Mutual fund managers analyze all options before investing. Their experience and expertise ensure that your investment flourishes.

3. Investing in mutual funds will help you diversify your portfolio. Having a diversified portfolio reduces risk and increases the chance for better returns.

4. The mutual fund you choose to invest in depends on you. Thus, there is no need to invest large amounts that you are not comfortable with.

5. Mutual funds are highly liquid investments. You can buy and sell them as and when you wish.

6. Despite not residing in India, NRIs have all the same benefits while investing. They have the option to invest through SIPs and can even switch when they want to. They have the option to opt for growth or dividend options. They can even repatriate the proceeds when they want to.

7. With online investing, anyone anywhere can now invest all around the world. Gone are the days of submitting physical forms, issuing cheques, or even being in that country. Sitting in another country, investors can track, manage and even switch their investments. There are many Asset Management Companies set up. They assist the NRIs in investing. They have online methods set in place to send all portfolio disclosures.

8. Many foreign investors are keen to invest in India. This is because there is a scope for gaining more profits, even if the rupee appreciates it. Thus if the value of the rupee appreciates against their currency, they will gain profits. An example is, an NRI from the USA invests 1000 dollars in a mutual fund in India. Assuming that the exchange rate is about 72 rupees to 1 dollar. Thus even with predicted depreciation, the investor will gain good profits.

9. Many NRIs have family in India dependent on them. Investing in mutual funds can give them a monetary back-up. It can allow you to accumulate your wealth and even strive towards deriving a set monthly income.

10. NRIs investing in mutual funds in India can derive many tax benefits. Investing in equity-linked saving schemes helps avail the long term capital gain tax benefits. This can help you save up to 1 lakh.

Procedure For An NRI Investing In Mutual Funds

The process to apply to start investing is quite similar for NRIs and residents.

The first step to investing in mutual funds in India is obtaining a KYC. Know Your Client is a one-time document is mandatory for anyone investing in mutual funds. Everyone, resident or non-resident, needs this document when starting investing. The SEBI does not allow anyone to invest without this.

For First Time Investors, The Documents Needed For KYC Are :

• Passport copy
• Proof that you an Overseas Resident and a copy of your Overseas Address
• PAN Card copy
• Passport size pictures
• Bank statements
• Filled KYC form

Other Specifications –

i. You might also need to get an in-person verification done. This IPV confirms your presence in said country and verifies all documents submitted.

If you are in India– You can do this by going to the nearby AMC, Karvy or CAMS branch.

If you are not in India– You can do this by going to any branch of a Scheduled Commercial Bank registered in India. An India Embassy or Consulate-General will be able to do this.

It may take up to 4 to 5 days for your KYC to get registered. After you receive your KYC, you can start investing.

Types Of Accounts Needed By NRI To Invest

To invest, NRIs should either have an NRO account, NRE account, or FCNR account. Most companies in India do not accept foreign currency investments.

• NRO stands for Non-Resident Ordinary Rupee and is a non-repatriable rupee account.
• NRE is a Non-Resident External Rupee account. It is a rupee account through which it is possible to send back money to your country. It is a repatriable rupee account.
• FCNR is a Foreign Currency Non- Resident account. It is a repatriable rupee account.

If You Have One Of These Accounts, There Are Two Ways You Can Invest :

A. Investing On Your Own –

Investing through regular banking channels is the key here. It lets you make all transactions yourself. Debiting and crediting is also done through this. Thus, giving you full freedom to invest your wealth. One important thing is to declare the investment as repatriable or non-repatriable. The type of account through which you are investing decides what type of investment it will be.

Many online portals allow you to invest in mutual funds on your own. Some options are-

• Mutual Fund Company websites
• CAMS or KARVY
• MF Utility India
• Online platforms provided by private players

B. Investing Through Power of Attorney –

If you are not able to handle investing from overseas, you can appoint a Power of Attorney. The POA holder must submit the original or a copy of the POA. The document must have the signatures of both the NRI and POA holder. Verification of the POA holder’s signatures is mandatory before they make any transaction.

The POA holder cannot do anything without registering the POA. When registered, the holder of this position will invest your money on your behalf. With the title, you give the person the authority to make any decision about your investments. Your Power of Attorney must be an Indian resident.

Redeeming Your Gains From The Investments

You or your Power of Attorney can redeem your gains. The redemption credit depends on whether the investment is repatriable or not.

When you choose to withdraw your investment, banks give you two options. Some banks will credit your gains to your account after deducting taxes. Other banks credit the entire redemption amount to their NRO or NRE account. If the investments are non-repatriable, the proceeds go to the NRO account. The proceeds gained through redemption are payable by cheque in Indian rupees.

Choosing Which Account Is Best For You: NRO Or NRE

It is essential to select which of the two accounts will work best for you. 

Taxing The Returns On Investments For An NRI

The biggest misconception that NRIs have is that they might have to pay double taxes. As long as your country of residence and India have signed the DTAT, they do not. Double Taxation Avoidance Treaty allows them to claim tax relief in one country. This is applicable if you have paid taxes on the other.

i. For Equity Mutual Funds :

Taxes on returns depend on the holding period.

• Short-term Capital Gains are for less than 12 months and are taxable at a rate of 15%.
• Long-term Capital Gains are for 12 months or more and are taxable at a rate of 10%. These gains are only taxed if they exceed 1 lakh every year.

ii. For Debt Mutual Funds :

• Short Term Capital Gains are for less than 12 months and are taxable at a rate of 30%.
• Long Term Capital Gains are for 12 months or more and are taxable at a rate of 20% with any indexation benefit.
• Long Term Capital Gains are taxable at a rate of 10% without indexation.

Indexation adjusts the price of an investment to reflect the effect of inflation.

iii. For Fixed Maturity Plans :

• If it matures in less than 3 years, the tax levied is as per your income slab.
• Long Term Capital Gains are taxable at a rate of 10% without indexation.
• Long Term Capital Gains are taxable at a rate of 20% with indexation benefits.

Investing For NRIs In USA And Canada

NRIs from the US and Canada have to comply to harsher requirements as compared to other nations. This is due to the onset of FATCA or the Foreign Account Tax Compliance Act.

After this, many AMCs refused to take on investments from NRIs in the USA or Canada. Thus, it is essential to see which fund house allows this. Many have certain conditions set in place to make the process easier for them.

AMCs That Accept NRI Investments

It is crucial to select a good and reliable AMC. They will help you gain good yields and lend you the best value for your buck.

• SBI Mutual Fund
• UTI Mutual Fund
• ICICI Prudential Mutual Fund
• HDFC Mutual Fund
• Birla Sun Life Mutual Fund
• Sundaram Mutual Fund
• DHFL Pramerica Mutual Fund
• L&T Mutual Fund
• PPFAS Mutual Fund

What NRIs Should Look Out For, Before Making Any Investments?

a. While applying for a KYC, there are some extra documents they have to include. These are proof of Overseas Residency and the Address.

b. If payment is through a draft or cheque, you must attach a FIRC. A Foreign Inward Remittance certificate helps confirm the source of the funds. A letter from the bank also does the same thing.

c. You should not provide any details of your foreign bank account. If provided, the application will get rejected. You should give the details of your Indian bank account at the time of application.

d. The right to repatriate your investment only remains till you are an NRI. They also have facilities like a Power of Attorney and the opportunity of having a nominee.

e. All rupee drafts are payable in the city where the application has been submitted. They can withdraw all cheques either from an abroad payable bank or the investor’s bank account. These two accounts must be in India.

f. It is important to know if your country is one of the 90 countries that have signed CRs. The Common Reporting Standard is a global system aiming to stop tax evasion.

Frequently Asked Questions (FAQs)

Bottom Line

Mutual funds can be beneficial for NRIs after crossing the initial hurdle. It has become a very sought-after investment, helping you secure your and your family’s future. This article contains all the information an NRI would need to get started. But, it is important to go through your finances and determine if investing in mutual funds will help you or not.