Mutual Funds: Nris' Smart Investment Choice

Non-resident Indians (NRIs) often seek investment opportunities in their home country, and mutual funds are a popular choice due to their potential for wealth creation and diversification. Mutual funds are a common pool of funds managed by a professional fund manager, offering investors automatic diversification and professional management of their funds. NRIs can invest in mutual funds in India, provided they follow the rules of the Foreign Exchange Management Act (FEMA) and have either a Non-Resident Ordinary (NRO) or a Non-Resident External (NRE) bank account. NRO accounts are ideal for those looking to manage their Indian income, while NRE accounts are perfect for those wanting to send their foreign earnings to India. By investing in mutual funds, NRIs can benefit from India's economic growth, enjoy portfolio diversification, and have the convenience of managing their investments remotely.

NRE and NRO accounts

Non-Resident Indians (NRIs) can invest in mutual funds in India, but they must comply with the Foreign Exchange Management Act (FEMA). NRIs can invest in mutual funds by opening an NRE or NRO account. These accounts allow NRIs to deposit their foreign earnings in India and manage their Indian earnings, respectively.

NRE Account for Mutual Fund Investments:

NRE (Non-Resident External) accounts are suitable for NRIs who want to deposit their foreign earnings in India. NRIs can use NRE accounts to invest in mutual funds on a full repatriable basis, meaning the redemption proceeds can be transferred to both NRE and NRO accounts. The main benefit of NRE accounts is that interest earned on deposited funds is tax-free in India.

NRO Account for Mutual Fund Investments:

NRO (Non-Resident Ordinary) accounts are for NRIs who want to manage their Indian earnings, such as rental income, dividends, or proceeds from property sales. NRIs can use funds from NRO accounts to invest in Indian mutual funds, but there are restrictions on repatriating funds to a foreign country. The redemption proceeds from mutual fund investments will be credited only to an NRO account.

Direct or Self Investment:

NRIs can invest directly in mutual fund schemes through regular banking channels using their NRE/NRO accounts. They will need to submit KYC documents, including photographs, self-attested copies of their Adhaar, PAN, passport, bank statements, and foreign residence proof. Some banks may require in-person verification, which can be done by visiting the Indian Embassy in the NRIs' country of residence.

Via Power of Attorney (PoA):

Another option for NRIs is to grant a Power of Attorney (PoA) to a trustworthy person who can invest on their behalf. The reputed AMCs allow PoA holders to invest and make investment decisions on behalf of NRIs. Both the NRI and the PoA holder must sign the KYC documents to be eligible for mutual fund investments in India.

In conclusion, NRIs can benefit from investing in mutual funds in India by diversifying their investment portfolios and contributing to India's economic growth. NRE and NRO accounts are essential tools for NRIs looking to invest in mutual funds, offering different features to suit their investment goals and sources of income.

Direct investment

Step 1: Set Up an NRE or NRO Account

Before investing in mutual funds, NRIs must first set up either a Non-Resident External (NRE) or a Non-Resident Ordinary (NRO) bank account with an Indian bank. This is because Asset Management Companies (AMCs) in India cannot accept foreign currency investments. Thus, all investments by NRIs are made in Indian Rupees. The type of account an NRI chooses depends on their preferences and needs. Here is a brief overview of each account type:

• NRE Account: This account is suitable for NRIs who want to transfer their foreign earnings to India. One of the main advantages of an NRE account is that the interest earned on funds deposited is tax-free in India.
• NRO Account: This account is ideal for NRIs who want to manage their income generated in India, such as rental income, dividends, or proceeds from property sales. NRO accounts offer the convenience of managing Indian earnings with the added benefit of repatriation (subject to applicable taxes).

Step 2: Submit Application and KYC Documents

Once the NRE or NRO account is activated, NRIs can start the process of direct investment in mutual funds. This involves submitting an application along with the required Know Your Customer (KYC) documents. The specific KYC requirements may vary, but generally, the following documents are needed:

• Passport copy
• PAN card
• Recent photograph
• Bank statement
• Proof of address (both foreign and Indian address)
• Date of birth

In some cases, in-person verification may be required. This can be done by visiting the Indian embassy in the NRI's country of residence.

Step 3: Invest Directly Through Regular Banking Channels

After completing the KYC process, NRIs can start investing in mutual funds directly through regular banking channels using their NRE or NRO account. They can invest in a variety of mutual fund schemes, including equity funds, debt funds, and hybrid funds, depending on their financial goals, risk appetite, and time horizon.

Step 4: Monitor and Manage Investments

One of the benefits of mutual fund investments for NRIs is the ability to manage their investments remotely. NRIs can invest, monitor, and redeem their mutual fund investments online from anywhere in the world. This convenience eliminates geographical barriers and gives NRIs full control over their investments.

Step 5: Understand Taxation and Compliance Requirements

When investing in mutual funds, NRIs must also consider the tax implications and compliance requirements. In terms of taxation, if India has signed the Double Taxation Avoidance Treaty (DTAA) with the NRI's country of residence, they can avoid double taxation. Additionally, the Foreign Account Tax Compliance Act (FATCA) mandates that all Indian and NRI investors file a FATCA self-declaration.

In terms of compliance, NRIs must adhere to the Foreign Exchange Management Act (FEMA) regulations and provide a declaration affirming their adherence to Indian regulations. They also need to understand the redemption process, which involves crediting the proceeds to the NRE/NRO account after tax deductions. For non-repatriable investments, proceeds are credited only to an NRO account.

Power of Attorney (PoA)

A Power of Attorney (PoA) is a legal document that authorises a designated person to operate a mutual fund folio or account on behalf of an NRI. The PoA holder can make transactions on the folio as per the powers outlined in the PoA document.

NRIs can invest in mutual funds in India either directly or through a PoA. The PoA route is a convenient alternative for those who don't have the time to manage their investments directly. A PoA can make investment decisions on their behalf, ensuring that investments are aligned with their financial goals and risk appetite.

• The PoA document must be notarised to be legally valid.
• The PoA can only be designated with the consent of all holders of the folio.
• A notarised PoA document, along with the signatures of all holders of the folio or account, needs to be submitted to the mutual fund company.
• The PoA will only have the powers explicitly laid out in the document.
• The PoA holder cannot modify or change nominees in a mutual fund scheme.
• NRIs can add or remove a PoA at any time by writing to the Asset Management Company (AMC).

When creating a PoA, it is crucial to choose a trustworthy individual as the PoA holder. The PoA should only be given to the right person, and it is generally not advisable to grant it to a mutual fund agent, as there have been cases of agents using the PoA to their advantage.

There are two types of PoA: General Power of Attorney (GPA) and Special Power of Attorney (SPA). A GPA provides the holder with a higher degree of authority to execute almost any transaction pertaining to legal or financial matters. On the other hand, an SPA is used for executing specific tasks, and the powers of the agent are revoked once the task is complete.

The process of creating a PoA involves preparing two original copies of the document, signing it at the Indian Embassy or Consulate's office, obtaining two witness signatures, paying the attestation fees, and then sending the attested document to the PoA holder in India. To make the PoA legally valid, the recipient must get it registered in India at the Sub-Divisional Magistrate's office within 90 days of receipt.

NRIs can revoke the PoA at any time by writing a letter to the respective mutual fund company. Both the registration and cancellation of the PoA will be reflected on the account statement as non-financial transactions. It is important to inform the mutual fund company of the cancellation to prevent the PoA holder from continuing to transact on the NRI's behalf.

Some best practices when creating a PoA include clearly mentioning the tasks the PoA holder is authorised to perform and including an indemnity clause to protect against any risks or losses arising from the PoA holder's actions.

Tax benefits

The tax benefits of investing in mutual funds for NRIs are twofold. Firstly, investing in mutual funds allows NRIs to benefit from India's Double Taxation Avoidance Treaty (DTAA) with certain countries. This means that NRIs can claim tax relief in their country of residence if they have already paid taxes in India.

Secondly, investing in mutual funds through an NRE account can provide tax advantages. The interest earned on funds deposited in an NRE account is tax-free in India. This makes NRE accounts a popular choice for NRIs looking to park their foreign earnings in India.

It is important to note that the definition of an NRI in the Foreign Exchange Management Act (FEMA) decides where they can invest, while the definition of an NRI in the Income Tax Act dictates how their gains will be taxed. Therefore, NRIs should be aware of both definitions to make informed investment decisions.

In terms of the tax implications of mutual funds, it is important to understand the different types of funds and their respective holding periods. For example, the tax on short-term capital gains (STCG) for equity-oriented mutual funds is 10% without indexation, while the tax on long-term capital gains (LTCG) is 10% with indexation.

Additionally, upon maturity or exit from a mutual fund investment, the proceeds are credited to the NRE/NRO account after tax deductions. For non-repatriable investments, proceeds are credited only to an NRO account.

To ensure compliance with tax regulations, NRIs must complete the Know Your Customer (KYC) process and submit relevant documentation, such as a passport copy, PAN card, recent photograph, bank statement, and proof of address.

By understanding the tax implications and adhering to regulatory requirements, NRIs can effectively navigate the Indian mutual fund landscape and secure their financial future.

Portfolio diversification

For example, an NRI can invest in equity funds, which primarily deal in stocks, or debt funds, which focus on fixed-income securities such as corporate bonds and government securities. Hybrid funds offer a mix of both, providing a balance between debt and equity. This variety of investment options allows NRIs to tailor their investments according to their financial goals, risk tolerance, and time horizon.

Additionally, mutual funds provide 'rupee cost averaging', meaning that investors buy more units when the market is low and fewer units when the market is high, averaging out the total cost. This safeguards the investor from market volatility, providing a smoother investment journey.

The Indian mutual fund market, with its diverse investment options, thus offers NRIs a viable and potentially lucrative opportunity to grow their wealth while contributing to the country's economic growth.

Frequently asked questions