Mutual Funds for NRIs in India: A Complete Guide

A few years ago, NRIs could think of or preferred only real estate and bank deposits as investment options in India. But with the vast information flow, and fintech push in the last few years, various other options have gained popularity like- PMS, NPS, Direct equities, Small-cases, Mutual funds, Bonds, and so on. (Check our Detailed post on NPS for NRIs)

Through these investment instruments, NRIs can not only reap the benefits from the growth of the Indian economy but also plan for their various goals in India like- Retirement, Parents’ care, Vacations, etc. which may not be possible only through bank deposits and real estate. (Read: Best Investment options for NRIs to invest in India)

In this article, we will focus on Mutual Funds for NRIs in India as an investment option and see the rules, requirements, advantages, taxation, and other aspects in detail. But let’s start with the basics first.

Can NRIs invest in Mutual Funds in India?

The answer is YES. Just like Indian residents, Non-Resident Indians (NRIs), Persons of Indian Origin (PIOs), and Overseas Citizens of India (OCIs) can also invest in mutual funds in India. (Also Read: How NRIs are different from PIOs and OCIs?)

They do not have to take any special permission from RBI or SEBI to invest in mutual funds. The only thing is you need to follow the FEMA rules and be KYC compliant. 

However, the mutual fund companies ask for additional documentation and compliances under FATCA from NRIs residing in the US and Canada and many fund houses do not allow them to invest due to the complexity involved in following these compliances.

Rules for fund repatriation and non-repatriation:

NRIs are allowed to invest in mutual funds through the money lying in the Indian Rupee denominated accounts, i.e., NRE or NRO accounts with the Indian banks. They cannot use the funds lying in an overseas bank account to invest in Indian mutual funds.

NRE or Non-Resident External is the INR denominated account meant for depositing any income earned abroad and carrying out the expenses over there. The money lying in this account can be freely repatriated to the country where you are residing.

On the other hand, a Non-Resident Ordinary or NRO account can be used for depositing any income earned in India and to carry out the expenses and investments in India. Money lying in this account can be repatriated only up to USD 1 Million per financial year subject to terms and conditions laid down in FEMA. You can check our detailed article on NRI Bank Accounts here. 

So, if you want to repatriate the money invested in mutual funds in India to your country of residence (outside India), it is better to invest on a repatriation basis using your NRE account.

On the other hand, if you want the money to be utilized in India itself, you should invest on a non-repatriation basis using your NRO account.

How can NRIs invest in mutual funds in India?

There are various ways or modes for NRIs to invest in mutual funds in India.

• Self/Direct mode: Just like an Indian resident, NRIs can also invest in mutual funds directly in various ways, like-
  • Through Demat account linked with the NRE or NRO account. Here you may be charged with a brokerage.
  • Through the website of the Asset Management Company
  • By opening an account with platforms like- MF Utilities, or using the CAMS or KFinkart mobile app.
  • Through the platform offered by various fin-tech start-ups (depending upon whether they accept NRI investor onboarding or not).
  • Personally visiting the branch office of any Asset Management Company.

• By Power of Attorney: NRIs can also invest in mutual funds in India by giving a Power of Attorney (PoA) to an Indian resident family member, relative, or any trusted person.

• Through an intermediary: NRIs can also take the services of an intermediary like- a mutual fund distributor, bank, etc. who can help them invest in NRI mutual funds in India. (Read: How NRIs can make the best use of Power of Attorney in India?)

• SEBI RIA: You can take the advisory services of a SEBI Registered Investment Advisor and/or Financial Planner and invest in mutual funds according to your risk appetite and in line with the requirements of your financial plan. Remember, the investment advisor may charge a fixed or a variable fee for the services depending upon the fee model of the RIA. (Read: What are the various fee models of SEBI RIAs?)

Requirements for investment in Mutual Fund for NRIs in India:

• KYC for NRIs: For investing in mutual funds for NRIs in India, you need to be KYC compliant. This is the first step for NRI mutual fund investment in India. The following documents need to be submitted along with the KYC verification form:
  • PAN Card (self-attested copy)
  • Indian Address Proof (self-attested copy of Aadhar/Driving License/Bank Statement)
  • Passport (self-attested copy of the first two pages and the last two pages) 
  • Foreign Address Proof (latest utility bill/ bank statement etc.)
  • Recent passport size photograph
  • Cancelled cheque leaf of NRE/NRO account.

If you are taking the services of an intermediary like a financial planner or a mutual fund distributor or using a platform they can help you with the process of KYC for NRI mutual funds in India. Else, you may submit these documents to any of the fund houses you desire to invest in. Some fund houses may also require you to do an in-person verification (IPV).

If you are an existing mutual fund investor and have become an NRI later, you need to update the mutual fund KYC details as soon as your residential status changes by re-submitting the updated documents. (Read: 10 important things to do before you become an NRI)

• FATCA and CRS declarations: Along with the KYC, NRIs also have to fill an additional form providing declarations like- Country of Birth, Nationality, Annual Income, Occupation, Country of tax residence, Tax Identification Number of the country, etc. to start investment in Indian Mutual Funds. You can go through more details on FATCA and CRS declarations in this article on the AMFI website.

If the investment is done on a joint name with another NRI, the KYC and FATCA declaration of the joint holder is also required. (Also Read: All about Joint Account Holding for NRIs in India)

• FIRC: In case you are making the investment via cheque or draft on which there is no mention of the type of account (NRE/NRO), you need to attach a Foreign Inward Remittance Certificate (FIRC) or a letter from the Bank along with, confirming the source of the funds. 

If you are the US or Canada-based NRI, there could be some other compliance requirements as well, and these may differ across fund houses. For example, some AMCs allow investments only through the physical mode, etc. You need to check the compliance norms and the requirements with each of the AMCs (those who accept investments from the US and Canada-based NRIs) before investing.

Advantages of Mutual Funds for NRIs in India:

Mutual funds for NRIs in India are one of the best investment options, offering various advantages.

Mutual Funds and Financial Planning:

Firstly, through mutual funds in India, NRIs can take the exposure to each and every asset class whether it is equity, debt, gold, etc., and design an investment portfolio based on the risk appetite. In other words, NRIs can do the Asset Allocation well through Mutual funds. (Read our article on the different Asset Classes here)

Also, there are various categories of mutual funds in India available for NRIs to invest in. You can choose between Equity, Debt, and Hybrid Funds based on your risk appetite, investment horizon, and financial goals. In addition, within equity funds too, there are various categories like- Large cap, mid cap, multi-cap, Flexi-cap, small-cap, etc. Similarly, debt and hybrid funds too, offer various options. (Read: What is a Mutual fund and types of mutual funds)

Since there is a wide variety of choices available, mutual funds also help in effective planning for financial goals. 

For short-term goals, debt mutual funds can be used. For medium-term goals, hybrid funds are good options. For long-term goals, an asset allocation approach can be followed by designing an investment portfolio with a mix of equity, debt, and other categories based on your risk appetite. Portfolio rebalancing can also be done very easily depending upon the requirements.

Mutual Funds vs. other investment options:

In addition, each category of mutual funds for NRIs has its own set of advantages which makes them an efficient investment option as compared to others.

If we talk about equity funds, these are managed by professional fund managers having years of experience and expertise in the industry offering a well-diversified portfolio of securities. It may not be possible for you to design by directly investing in the stock market in India.

Even if we compare equity mutual funds in India with Portfolio Management Services (PMS), these are more efficient in various parameters like- taxation, liquidity, cost, etc. (Read: How PMS investment is different from Mutual funds in India?)

When it comes to debt mutual funds in India, within this space too there are various categories that have the potential to generate higher returns and are more efficient than NRO FDs in India, over a 3-Years+ horizon.

Of course, the risk element would also be a bit higher as compared to FDs. Debt mutual funds are exposed to various risks like- credit risks, liquidity risks, interest rate risks, etc. But, these risks can be managed by designing a well-diversified debt mutual funds portfolio, across categories. (Also Read: How to manage debt funds risk in an investment portfolio?)

Also, debt mutual funds offer better liquidity than NRE FDs. In the latter case, if you break the FD before the minimum investment tenure, i.e.,1 year you lose all the interest. In a way, your entire investment is locked in for a minimum tenure of 1 year. But, there is no such restriction on debt funds. You can withdraw the amount whenever you want. 

However, in some categories, if you withdraw your investment before a stipulated period (generally 12-18 months), it is subject to a small exit load.

Also Check- Taxation of NRE Fixed Deposit for returning NRIs

Ease in management and tracking:

Lastly, NRIs can manage mutual fund investments in India online from anywhere in a paperless manner. Not only investments, but transfers, and withdrawals can also be seamlessly carried out online. You can track the performance of your portfolio online as well. In addition, you can download the mutual fund Consolidated Account Statement (CAS) for a single window view of all your mutual fund holdings across AMCs. (Also Read: Mutual fund CAS and its advantages)

Mutual Fund Taxation for NRIs in India 

Taxation rules for gains on mutual funds for NRIs are similar to that of the resident Indians. The only difference is that for NRIs, the gains are subject to TDS which is not the case with the resident individuals. (Also Read: TDS on NRI investments)

The short-term capital gains (if the investment is redeemed within 12 months) on equity mutual funds for NRIs are taxed at 15% whereas long-term capital gains in excess of Rs.1 Lakh (after 12 months) are taxed at 10%. TDS is also deducted at the same rates.

The taxation on short-term capital gains on non-equity mutual funds for NRIs is 30% (if redeemed within 36 months of investment). The long-term capital gains tax on non-equity mutual funds (holding period more than 36 months) is 20% with indexation, if listed or 10% without indexation, if unlisted. TDS rates are also the same as tax rates. You can check our detailed article on the Taxation rules for mutual funds for NRIs here.

The other thing is that NRIs need not pay dual tax on the gains from mutual fund investment in India. You can take the benefits of the DTAA treaty signed between India and your Country of Residence. India has a Double Taxation Avoidance Agreement with most countries. (Read our Article on DTAA here)

Simply put, if you have paid tax in India and the tax liability is higher in your resident country, you need to pay only the balance amount as tax in that country. However, to avail of the benefits of the provisions of DTAA, NRIs need to submit certain documents confirming they are eligible for the same.

Also check- How NRIs can take the best advantage of the INR depreciation? 

Conclusion:

If as an NRI you have financial goals in India or want to return to India for good in your retirement years, you have good reasons to invest in India. If you have no plans to come back then too, investing in India could give you geographic diversification, and you can reap the benefits from India’s growth story. (Also Read: NRI Retiring in India- important things to consider)

Mutual funds are undoubtedly one of the best investment options for NRIs to invest in India. These can not only help you reach your financial goals but also help create wealth in the long term. (There might be compliance and taxation issues in mutual funds for NRIs in India with some countries like- the US, UK, Canada, etc.)

But, it is also true that with a wider variety of choices, confusion increases too. NRIs being a busy lot, may not have the time to manage their investments. In addition, you may not have the expertise as well.

You have other important things to take care of like- professional growth, spending quality time with family, taking care of health, etc. So, it is wise to take help from professionals, wherever necessary.