Mutual Funds: Investing In India From The Usa

There are several ways for US-based investors to invest in Indian mutual funds. These include direct and indirect investment options. Direct investment options include opening a global trading account with a domestic agent or an overseas trading account with a foreign broker. Indirect investment options include investing through international mutual fund programmes or exchange-traded funds (ETFs). It is important to note that US-based investors may face certain compliance considerations and tax implications when investing in Indian mutual funds. Additionally, there are risks associated with international investing, such as currency risk, higher expense ratios, and foreign market risk.

Direct investment in stocks

If you are a US resident looking to invest in Indian mutual funds, you may face certain compliance considerations. However, there are many Asset Management Companies (AMCs) in India that allow US residents to invest in mutual funds in a straightforward way.

US residents can invest directly in Indian stocks by opening an overseas trading account with a domestic or foreign broker. Here are the steps to follow:

• Opening an Overseas Trading Account with a Domestic Broker: Many domestic brokers in India have partnerships with stockbrokers in the US, allowing them to act as intermediaries and execute trades on your behalf. You will likely need to submit a set of documents to open this type of account, and there may be restrictions on certain investment vehicles or the number of trades you can make. Additionally, consider the costs, including brokerage and currency conversion charges.
• Opening an Overseas Trading Account with a Foreign Broker: You can also open an overseas trading account directly with a foreign broker that has a presence in India, such as Charles Schwab, Ameritrade, or Interactive Brokers. Be sure to understand the fees and charges before opening the account.

When investing directly in Indian stocks, it is important to be aware of the risks and challenges, such as currency exchange fluctuations, different tax regulations, and geopolitical events or economic policies that can impact stock prices. Conduct thorough research and stay informed about global economic trends to make informed investment decisions.

Indirect investment in stocks via mutual funds or ETFs

If you are a US-based investor looking to indirectly invest in Indian stocks via mutual funds or ETFs, there are a few things you should know. Firstly, mutual funds and ETFs provide a way to invest in a diversified portfolio of stocks or other securities, managed by professionals. This makes them suitable for those who prefer a hands-off approach to investing.

When it comes to investing in Indian stocks, there are two main options: direct investment and indirect investment. Indirect investment in Indian stocks can be done through mutual funds or ETFs that focus on India or the broader international market. Here are the steps you can follow:

• Choose the right investment vehicle: Decide whether you want to invest through mutual funds or ETFs. Both options have their own advantages and should be chosen based on your investment goals, risk tolerance, and preferences.
• Research and compare different funds or ETFs: Look for funds or ETFs that have a strong track record of performance and are managed by reputable fund managers. Compare the fees and expenses associated with each option, as these can eat into your returns.
• Understand the risks and potential returns: International investing carries certain risks, including foreign market risk, exchange rate risk, and concentration risk. Make sure you understand the specific risks associated with investing in Indian stocks and the potential impact on your investment portfolio.
• Open a brokerage account: To invest in mutual funds or ETFs, you will need to open an account with a broker that offers access to the Indian market. Some brokers may have additional requirements or restrictions for US-based investors, so be sure to do your research.
• Invest according to your plan: Once you have chosen a broker and selected the funds or ETFs that align with your investment strategy, you can initiate the investment process by purchasing shares of the desired funds or ETFs.

It is important to note that investing in Indian stocks through mutual funds or ETFs may be subject to regulatory and compliance requirements, such as those outlined by the Foreign Account Tax Compliance Act (FATCA) and the Double Taxation Avoidance Agreement (DTAA). These regulations aim to prevent tax evasion and ensure proper reporting of income generated from investments.

Additionally, the taxation of mutual funds and ETFs may differ from domestic investments. In India, mutual funds investing in US equities are typically classified as debt mutual funds and taxed accordingly. Be sure to consult with a tax professional to understand the specific tax implications for your investments.

Tax implications of investing in US mutual funds

When investing in US mutual funds from India, it's important to understand the tax implications to ensure you're compliant with the regulations of both countries. Here's a detailed overview of the tax considerations:

Dividend Taxation

Dividend income from US stocks is subject to taxation in both the US and India. According to the India-US Double Taxation Avoidance Agreement (DTAA), dividends from US stocks are taxed at a maximum rate of 25% in the US. This rate is lower than the standard tax rate for foreign investors in the US due to the tax treaty between the two countries.

When filing income tax returns in India, dividend income must be included in your total income and taxed at your normal slab rate. While this may seem like double taxation, the DTAA allows you to claim a foreign tax credit and offset the tax withheld in the US against your tax liability in India.

Capital Gains Tax

Capital gains tax is another important consideration when investing in US mutual funds. While there is no capital gains tax in the US for non-resident aliens, any capital gains made on the sale of US stocks are taxable in India. The tax rate depends on the period of holding the stocks:

• Long-Term Capital Gains (LTCG): If you hold US stocks for more than 24 months, your gains will be taxed at 20% plus surcharge and cess in India.
• Short-Term Capital Gains (STCG): If you hold US stocks for less than 24 months, your gains will be taxed according to your income slab rate in India.

Exchange Rate Considerations

When calculating taxes on dividend income or capital gains from US stocks, it's important to consider exchange rate fluctuations. The SBI TT buying rate is used to convert USD to INR for tax calculations. The applicable exchange rate is the rate on the last day of the month immediately preceding the month in which the dividend is declared or paid by the company.

Compliance Requirements

For US citizens or residents investing in Indian mutual funds, it's important to be aware of the US tax rules. The United States follows a worldwide income taxation model, which means that US taxpayers are generally taxed on their worldwide income, including income generated from Indian mutual funds. This can be complicated by the fact that Indian mutual funds often fall into the PFIC (Passive Foreign Investment Companies) category for US tax purposes, leading to additional complexities.

In conclusion, while investing in US mutual funds from India can provide attractive investment opportunities, it's crucial to carefully consider the tax implications in both countries. Understanding the applicable tax rates, double taxation agreements, and compliance requirements will help ensure that you make informed investment decisions and meet your tax obligations in both the US and India.

Compliance considerations for US/Canada NRIs

US/Canada NRIs are faced with certain compliance considerations if they are looking to invest in India due to the Foreign Account Tax Compliance Act (FATCA). This Act requires all financial institutions to share details of all transactions involving US citizens, including NRIs, with the US government. The purpose of FATCA is to ensure there is no deliberate tax evasion on the income generated by US citizens overseas.

As a result of FATCA, mutual fund houses stopped taking investments from the USA and Canada. However, after consultation with experts, many have resumed investments from these countries but with some conditions applied. For example, ICICI Prudential AMC, Birla Sun Life Mutual Fund, and SBI Mutual Fund allow US and Canada investments only through offline transactions with an additional declaration signed by the client. L&T Mutual Fund does not permit such investments in close-ended funds.

To invest in Indian mutual funds, US/Canada NRIs must first open an NRE, NRO, or FCNR account with an Indian bank, as mutual fund houses are not allowed to accept investments in foreign currencies.

There are two main options for investment:

• Direct/Self-investment: All the basic transactions, debiting, and crediting can be done by NRIs through usual banking channels. The investment application must be attached to the required Know Your Customer (KYC) details.
• Via Power of Attorney: Asset Management Companies (AMCs) allow NRIs to invest through another person. NRIs can give their Power of Attorney (PoA) to someone else to make decisions regarding their investments. However, the signature of both the NRI investor and the PoA holder should be present on the KYC documents at the time of the investment application.

NRIs must also comply with the rules for NRI mutual fund investments, which are governed by the Foreign Exchange Management Act 1999 (FEMA). As per FEMA, NRIs are allowed to make investments in the capital markets, including direct stocks, exchange-traded funds (ETFs), and mutual funds, but only in compliance with certain conditions. These conditions include the fresh filing of KYC documents and the opening of a rupee-denominated NRE or NRO account.

Pros and cons of investing in US mutual funds

Investing in US mutual funds from India can be a great way to diversify your portfolio and gain exposure to the world's largest economy. However, there are some pros and cons to consider before making any investment decisions.

Pros of Investing in US Mutual Funds:

• International Diversification: Investing in US mutual funds allows you to diversify your investment portfolio across geographies. This can help mitigate market risk and protect your portfolio from adverse country-specific events.
• Exposure to Leading Global Companies: US mutual funds provide access to well-known and trusted global companies, such as Apple, Amazon, and Microsoft. Investing in these companies can boost the wealth creation potential of your portfolio.
• Strong Historical Performance: The US stock market has consistently outperformed the Indian stock market over the long term. This is due to various factors, including the size and maturity of the US economy, robust corporate governance, and deep liquidity.
• Potential for Higher Returns: The strong historical performance of the US market suggests the potential for higher long-term returns compared to the Indian market.
• Easy and Straightforward Process: Investing in US mutual funds can be done through a Fund of Funds (FOF), which is a simple and straightforward way to gain access to the US stock market without the complexities of investing directly in international markets.

Cons of Investing in US Mutual Funds:

• Exchange Rate Risk: Fluctuations in the USD-INR exchange rate can impact the value of your investments. If the Indian Rupee depreciates against the US Dollar, the value of your investments may be adversely affected.
• Regulatory Risk: Changes in US regulatory and economic policies can have a significant impact on your investments. It is important to stay informed about potential policy changes that may affect your portfolio.
• Liquidity Risk: Some US-focused Funds of Funds may have low liquidity, making it challenging and time-consuming to redeem your investments.
• Foreign Market Risk: Investing in international markets exposes you to the economic, political, and market risks specific to that country. These risks may be higher in emerging markets with less stable economic and political systems.
• Concentration Risk: An international mutual fund with a concentrated investment portfolio may be vulnerable to sector-specific downturns, leading to higher return fluctuations.
• Higher Expense Ratios: Funds of Funds typically have higher expense ratios compared to domestic mutual funds due to the additional layer of management and administrative fees.

Frequently asked questions