Tips And Guide To Invest In Mutual Funds For NRI
In a commercial climate ridden with multiple complexities, being an astute and deft investor requires a blend of both, prudence and diligence. Not only do you have to cautiously consider a multitude of investment options, but you also have to ensure that you select the specific one, which meets your needs in the best possible way. It thus comes as no surprise that a number of national and international investors have increasingly begun to use mutual funds as a medium of fulfilling their short-term aims while strengthening their long-term investment commitments.
Although investing in mutual funds is a relatively simple affair for those based in India, what happens when you migrate abroad? Would you still be able to place your money in Indian mutual funds or would this investment option be permanently closed for you? If not, would there be any monetary limits or tax implications of investing from outside the country? As a non-resident Indian (NRI), if you too are grappling with such potent questions, here is a comprehensive guide to help you understand everything that you need to know about NRI mutual fund investments.
Can NRIs Invest In Mutual Funds?
To put it simply, it is indeed possible for NRIs to invest in Indian mutual funds. Neither do they require a sanction from authorities like the Reserve bank of India (RBI) nor do they have to follow any special or predefined procedure. However, all of their investments are regulated under the Foreign exchange management act (FEMA), 1999.
According to this act, NRI investments in mutual funds can be made on either of the following basis:
- Repatriable– For this, you must possess a non-resident external (NRE) account with any Indian bank. The money you invest would be emitted from the foreign country to your home country or vice versa, via the usual banking channels.
- Non–Repatriable– In order to make investments on a non-repatriable basis, the sole requirement is to hold a non-resident ordinary (NRO) account in any bank based in India. The facility for non-repatriable investment has also been made available to overseas citizens of India (OCI).
How Can NRIs Invest In Mutual Funds In India?
As an NRI, if you want to invest in mutual funds in India, the procedure you need to follow is no different than the process recommended for residents. All you have to do is adhere to a step-by-step approach, in which you must:
- Open an NRE, NRO, or a foreign currency non-resident (FCNR) account with an Indian bank.
- Pick out a mutual fund scheme of your choice and fill out an application form.
- Furnish your KYC details that include copies of PAN card, passport, address proof outside India, a bank statement, and a recent photograph.
- Submit this form at the nearest investor service center in your country of residence.
- You will have to draw a cheque or a bank draft which is payable in Indian currency only as the asset management companies (AMCs) cannot accept foreign currency payments.
- If the bank asks for physical verification, you might have to visit the nearest Indian embassy.
- Alternately, you can also submit an online application for mutual fund investment.
The final proceeds of redemption will be paid in the account number that you had initially furnished in the application form. You can either invest on your own, i.e. directly or nominate another person to invest on your behalf. If you opt for the latter route, a power of attorney (PoA) would have to be provided with the signatures of both, the investor and the PoA holder. The PoA holder would also be free to take any investment decisions on your behalf.
Benefits Of Investing In MFs for NRIs
Considered to be an economy with immense potential, the Indian mutual fund sector continues to attract numerous investments from abroad. This is primarily because most NRI investors are provided with a plethora of benefits like:
The entire investment process can easily be managed online. Irrespective of where you are based, you can buy, redeem, and track your mutual funds over the internet. Furthermore, switching from one type of plan to another is just a click away. Even the AMCs tend to interact with customers and make portfolio disclosures via e-mail.
If you are a resident of a country whose currency has a higher value than the rupee, you are bound to make significant profits, despite depreciation. For example, if you invest 1000 pounds in an Indian mutual fund, your returns arising out of compounding and rupee cost averaging would be much greater than the initial capital.
As compared to other avenues of international investment, Indian mutual funds carry lesser risk. They are adequately diversified amongst different sectors so that the loss in one can be compensated by the gain in another. With strong economic fundamentals backing their growth, the funds develop a low-risk profile.
Indian mutual funds come with a lot of tax benefits which can help you save your hard-earned money. For instance, if you invest in equity-linked saving schemes (ELSS), you would be able to avail long-term capital gains (LTCG) tax benefits amounting up to Rs. 1 Lakh. Such humongous savings are not provided for by any other investment instrument.
In the future, if you plan to move back into India or want to provide for your dependents living here, mutual fund investments can prove to be a strong monetary back-up. They can empower you to accumulate capital, create wealth, fulfill specific objectives and even derive a regular monthly income
MF Regulations For NRIs
For NRIs, the following mutual fund regulations apply:
- The Know Your Customer (KYC) process needs to be completed at the earliest. The documentation submitted for this purpose must be validated by duly signing and stamping it.
- If the payment has been made through a cheque or a draft, the AMC will ask you to furnish a Foreign Inward Remittance Certificate (FIRC). This is merely done to confirm if the source of the funding is legal.
- In case a FIRC cannot be obtained at a short notice, a letter of comfort from an Indian bank would have to be attached.
- The final corpus, i.e. investment plus interest, would directly be deposited into your bank account whenever you choose to redeem your funds. Depending on whether your investment is repatriable or non-repatriable, the account used can be NRE or NRO.
- If any taxes accrue out of your total investments, they would have to be paid by you within the prescribed time period.
While investing in Indian mutual funds, it would entirely be your responsibility to make sure that all of these regulations are followed in letter and spirit.
For most NRI investors, the fear of being doubly taxed takes precedence over every other investment consideration. However, the good part is that Indian mutual fund taxes are one of the lowest in the world. Moreover, if the country of your residence has signed a double-tax avoidance agreement (DTAA) with India, you would only have to pay tax once.
This can be better understood with the help of an example. Let us consider that as a resident of the United States, you have invested in Indian mutual funds. Now, if you have appropriately met your tax obligation in India, you can simply claim tax relief in the US.
Within India, nonetheless, mutual funds are treated as capital assets. Thereby, you would be subjected to the following type of taxes:
For Equity Funds
- The dividends reaped from equity mutual funds are completely tax-free for a period of one year.
- For a time period beyond one year, a 10% long-term capital gains (LTCG) tax is deducted at source.
- If you make a withdrawal before the first year is over, a 15% short-term capital gains tax is levied.
For Debt Funds
- All the gains made on debt mutual funds within a time period of 3 years are added to your income and taxed at the commensurate slab rate.
- If the fund is held for more than 3 years, a 20% capital gains tax is charged with the benefit of indexation.
- If you prefer to not opt for the indexation process, the tax charged would only be around 10%.
Mutual funds, however, do not attract a wealth tax. The AMCs usually dispatch the tax certificates and the redemption warrants to the NRI investors on an annual basis.
Top AMCs to Invest In
If you are unaware about which AMCs can offer the best mutual funds, here is a list of the top performing funds which can lend you the best value for your money:
- SBI mutual funds
- UTI mutual funds
- ICICI Prudential mutual funds
- HDFC mutual funds
- Birla Sun Life Mutual funds
Investing in these credible AMCs would help you reap good yields without chipping into your principal amount.
Things To Consider
Although investing in mutual funds is a seamless task, you must consider a few factors before you invest. These include:
- The right to repatriation is available only as long as you are an NRI. The moment your residential status changes, this right is forgone.
- Make sure that you keep a copy of your foreign address handy. It is often asked for by different fund houses, AMCs, and banks.
- Check the compliance guidelines in the country of your residence. In the US, for example, the FATCA guidelines, as far as they concern financial transactions, have to be strictly adhered to.
- Verify if the country you are living in has signed the global Common reporting standards (CRS) meant to combat tax fraud.
- Last but not least, ensure that you are following all legal provisions in totality.
If you are an NRI who is looking to invest in Indian mutual funds, you can seek assistance from online platforms like Orowealth. With their smart advisory services, predictive technologies, and time-tested strategies, you would be able to earn more with every fund investment.
Being highly diversified and professionally managed, mutual funds are largely considered to be one of those rare financial instruments which provide a semblance of safety, security, and reliability, even in the times of grave economic distress. They don’t just help you accomplish your financial objectives, but they also ascertain that your risk profile is minimized and your reward potential is maximized.