How Can NRI Invest in Mutual Funds in India?

According to the survey reports, about 32 million NRIs are residing outside India. The world's largest overseas diaspora is made up of Indians. About 25 lakhs Indians migrate overseas yearly. It’s the highest annual number of migrants in the world. The remittance made by the World Bank to India has been the highest, showing the 2.9% contribution of NRIs to Indian GDP.

Looking at the increase in the number of NRIs in the last decade, a question arises about where can an NRI make an investment in India? And when we talk about investment one of the most popular investment vehicles is mutual fund for NRI. But do Indian laws encourage NRI investment in mutual funds in India? Let's try to answer these questions and related queries here in an informative way.

Can NRIs Invest in Mutual Funds?

While thinking about NRIs' willingness to invest in Indian mutual funds, there arise a lot of questions and confusion associated with the investment itself. Firstly, we would like to let you know that NRIs CAN invest in mutual funds in India. The foremost thing required is to abide by the rules of FEMA (Foreign Exchange Management ACT). The definition of NRI according to FEMA will decide your investment in mutual funds as an NRI.

How Can NRIs Invest in Mutual Funds in India?

An NRI can invest by any of the below methods:

1. Self/Direct: The mutual fund application, together with the requisite KYC information, must state whether the investment is repatriable or non-repatriable. KYC papers include the most recent photograph, authenticated copies of the PAN card, passport, proof of residency (outside of India), and a bank statement. The bank may request in-person verification, which you may do by contacting the Indian Embassy in your home country.

2. Another common strategy is to give someone else the authority to make investments on your behalf. AMCs provide the power of attorney (POA) holders the ability to make financial choices and invest on your behalf. If you want to invest in mutual funds in India, however, the KYC paperwork must have the signatures of both the NRI investor and the POA holder.

Although NRIs/ PIOs can invest in mutual funds in India, they must adhere to the regulations laid down by the Indian government. Schedule 5 of the Foreign Exchange Management (Transfer or Issue of Security by a Person Resident Outside India) Act, 2000, popularly known as FEMA, specifies the rules NRIs must follow for investing in mutual funds.

However, of the forty-four (44) mutual fund houses or AMCs (Asset Management Companies) in India, some AMCs do not accept mutual fund applications from NRIs, PIOs, or OCIs (Overseas Citizens of India) based in the United States or Canada. This is because Indian mutual fund houses have to comply with tedious paperwork under the regulations of FATCA (Foreign Account Tax Compliance Act) when they accept deposits from NRIs, PIOs, or OCIs based in the US or Canada.

Hence, if you live in the US or Canada, it is wise to consult a professional financial advisor to check the detailed rules before submitting the mutual fund application form.

What is the Process of Investment?

Opening an account
The first step toward proceeding with the investment process is setting up an account in a bank for financial transactions. Because AMC and third-party mutual funds distributors cannot accept money for investment in foreign currencies as per rules and regulations of India. Here arises another question, how to set up an account? The answer is very simple as follows:

There are two types of accounts

1. NRE account- It is a bank account opened in India in the name of an NRI, to park his money earned as foreign income.

2. NRO account - It is a bank account opened in India in the name of an NRI, to manage the income earned by him in India.

An NRI can choose to open an account in a bank by opting for the best suitable option to avail mutual funds for NRI.

The next step is to decide ‘how to invest?’ whether by self or by appointing a PoA.

1. Investing by self

Submission of valid KYC documents consisting of recent photographs, residence proof of NRI in the country he is currently residing outside India, a PAN card copy, passport copy, and bank statement.
In-person verification by visiting the Indian embassy in the country he is residing can be requested sometimes.

2. By appointing Power of Attorney

This method can be opted by submitting the signed KYC of the account holder and his power of attorney to testify that the account holder can invest and make decisions related to the investments made in the mutual funds on behalf of the account holder (NRI).

3. KYC verification process

Canceled cheque leaf of NRO, NRE, or FCNR bank account.
Certified foreign address proof – residential permit, latest utility bill, DL with address, etc.
Indian address proof – latest utility bill, DL, Aadhar card, Bank statement, etc. Passport – first two and last two pages.

4. Redemption of mutual fund investment

Every AMC or third-party mutual fund distributor has different policies for mutual fund investment redemption. Generally, while redeeming the funds, the tax deduction is made at the source itself.
Then the amount is credited to the NRE or NRO account or sometimes a cheque is handed over for the same.

So the investing process is fairly clear. However, a major question still remains- how many investment options are there for NRIs? What are the funds they can invest in?

List of Mutual Fund Houses That Accept NRI Investments

Only these below-mentioned fund houses allow investment from NRIs based in US and Canada

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

Taxes Applicable for NRIs Investment in Mutual Funds

DTAA method of taxation

With the Double Tax Avoidance Agreement (DTAA), NRIs can avoid paying taxes twice. India has a DTAA agreement with several countries like the US, UK, Canada, Australia, and others. For example, if you have paid tax in India on a particular source of income, a tax deduction can be claimed in the other country for the same. This saves you from paying taxes twice for the same income.

Taxes on equity mutual funds investment

A tax of 15% on short-term capital gains is applicable. On the other hand, long term capital gains of up to Rs 1 lakh are tax free, above which 10% tax is levied.

Taxation on debt mutual funds

For NRIs, short term capital gains from debt funds are taxed at 30%, while the tax on long-term capital gains is 20% with indexation. For LTCG, there is also an option to pay only 10% tax but you cannot claim indexation benefits in this case.

NRIs benefit from mutual fund investments

Mutual funds offer you an excellent way to show your love for the country. Since the money you invest goes directly into stocks or debt instruments, you hold a prime position in shaping the Indian growth story. Besides this, mutual funds for NRIs offer the following benefits:

Flexibility and Affordability

Mutual funds are more flexible than many other investment instruments. You can choose between open-ended and closed-ended funds. You may also invest in a SIP (Systematic Investment Plan), SWP (Systematic Withdrawal Plan), dividend payout plan, dividend reinvestment plan, etc. Moreover, you may choose from a wide range of investment schemes like equity, debt, capital protection, commodity, liquid, hybrid aggressive, hybrid conservative, and the likes. The minimum investment starts from INR 500 (SIP investments) and INR 5,000 (lump sum investments). Hence, NRIs can invest in mutual funds irrespective of their financial condition.

Liquidity

Mutual funds are typically more liquid than conventional financial instruments like fixed deposits or sovereign saving schemes. If you invest in an open-ended fund, you can withdraw your investments anytime you want. However, if the withdrawal date is within one year from the date of investment, you may have to pay a small fee to withdraw your funds. The fund gets reflected in your account within five (5) days from the date of order placing, and you can conveniently repatriate or non-repatriate the amount.

Cost-Saving

When you invest in equities directly, you need to pay a brokerage fee, coupled with SEBI charges, Securities Transaction Tax, stamp duty, etc. However, when you invest in a mutual fund, the AMC only charges an expense fee for managing your money, which is considerably lower than stock trading. And, lower account management fees might give some additional breathing space to your investment to grow.

Diversification

Mutual funds allow you to diversify your investment and reduce the risks. You can divide your total investment across categories like equity, debt, and hybrid. Equity funds generally offer higher returns than other categories. Debt funds offer capital appreciation without much risk. And hybrid funds are best suited for decent capital growth along with capital protection.

Important points to recollect

1. Only until the time one remains an NRI, his investment has the right of repatriation of the amount invested and the amount earned.

2. Submission of proof of residency of the currently residing country is compulsory. Hence, do not forget to provide an attested copy with the application.

3. Guidelines in the US and Canada when compared to other countries are strict. As per the FATCA rule, all financial institutions are bound to share information about financial transactions with US or Canada based residents.

4. Only eight fund houses accept mutual fund investments from NRIs living in the US and Canada.

To Conclude- Why NRIs Should Invest in Mutual Funds?

Mutual funds allow investors to earn higher returns and bear less risk as compared to other investment instruments such as stocks. This is pretty much obvious! The other key reason, particularly for NRIs, is portfolio diversification.

If you are a NRI and you are already investing in the mutual funds of the country where you are residing then you should also invest in mutual funds of India. This will enable geographical diversification, which in turn, will offer more protection to your portfolio. If funds of one geographical region performs poorly because of some local reasons, investments made in funds of other regions will keep your portfolio stable by compensating for the losses.

Know what? 5Paisa lists the top mutual funds of India from all the major fund houses. Signup and start investing in the best funds with as little as Rs 500.