Investing in Mutual Funds in India a Comprehensive Guide for NRIs OCI

The Indian stock market offers excellent opportunities for Non-Resident Indians (NRIs) and Overseas Citizens of India ( OCIs) to grow their wealth in India. While NRIs can directly invest in stocks if they have the expertise, investing in mutual funds is a smart and cost-effective solution for all types of investors. This guide provides information on how NRIs can invest in mutual funds in India, the benefits they can enjoy, the investment process, taxation considerations, and important factors to keep in mind.

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Can NRIs Invest in Mutual Funds in India?

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3 easy steps for NRIs to invest in Mutual Funds

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Absolutely! NRIs, Persons of Indian Origin (PIOs), and Overseas Citizens of India (OCIs) can invest in mutual funds in India as long as they comply with the rules outlined in the Foreign Exchange Management Act (FEMA). This opens up a wide range of investment opportunities for NRIs to participate in the Indian market and potentially benefit from its growth.

However, it's worth noting that some mutual fund houses may not accept applications from NRIs based in the US and Canada due to the complex paperwork required by the Foreign Account Tax Compliance Act (FATCA). Nonetheless, many reputable mutual fund houses do accept investments from NRIs based in the US and Canada, although with specific terms and conditions.

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Benefits of Mutual Funds for NRIs/ OCIs

Before diving into the process of investing in mutual funds in India, let's explore the benefits that NRIs can enjoy by investing in these financial instruments:

1. Diverse Range of Schemes: Mutual funds offer a wide variety of schemes to cater to the diverse needs of NRIs. There are three main categories for NRI investment in mutual funds in India: equity funds, debt funds, and hybrid funds. Equity funds primarily invest in stocks, providing potential long-term capital appreciation. Debt funds invest in bonds and other fixed-income instruments, offering stable returns. Hybrid funds strike a balance between equity and debt instruments, providing a combination of growth and stability.

2. Convenient Online Management: One of the key advantages of investing in mutual funds as an NRI is the ease of buying and managing funds online from anywhere in the world. NRIs can buy and redeem mutual funds online using their NRI accounts, eliminating the need for physical paperwork and enabling seamless transactions. Additionally, investors can switch units of different mutual fund schemes and opt for systematic transfers or withdrawals online. Tracking investments and receiving consolidated account statements is also effortless through online platforms.

3. Portfolio Diversification: NRIs often tend to disproportionately invest in fixed-return assets such as bank fixed deposits, gold, and real estate. By investing in mutual funds, NRIs can diversify their portfolios and potentially increase their income generation. Mutual funds invest in a range of financial instruments, including equity shares and fixed-income securities, which helps spread the risk and enhance the potential for returns. This diversification can be particularly beneficial in achieving long-term financial goals.

4. Opportunities for Profit from Rupee Appreciation: NRIs can also benefit from the potential appreciation of the Indian Rupee (INR) against their country of residence's currency. If the value of INR appreciates, NRIs investing in mutual funds denominated in INR can earn higher returns. For example, if a US-based NRI invests $1000 in a mutual fund in India at an exchange rate of Rs. 75 to 1 USD, they stand to gain if the INR appreciates against the USD.

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Steps for NRI Investment in Mutual Funds

Now that we understand the benefits, let's delve into the step-by-step process for NRIs to invest in mutual funds in India.

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Step 1: Open the Appropriate NRI Bank Account

Mutual fund Asset Management Companies (AMCs) in India cannot accept investments in foreign currency. Therefore, NRIs must open an NRE (Non-Resident External) account, an NRO (Non-Residential Ordinary) account, or an FCNR (Foreign Currency Non-Resident) account with an Indian bank. The choice of account depends on the purpose and nature of your investments.

• NRE Account: NRIs who wish to save and manage their foreign earnings in India can opt for an NRE (Non-Resident External) account. This account allows NRIs to hold their funds in Indian currency, and the funds are fully repatriable. In simpler terms, NRIs can freely transfer the money from their NRE account back to their country of residence without any restrictions.
• NRO Account: NRIs can open an NRO (Non-Residential Ordinary) account to manage their income generated in India, as well as their foreign income. Funds held in an NRO account have certain limitations on repatriation. This means that there are restrictions on transferring the money back to the country of residence. However, NRIs can still use the funds in the NRO account for various purposes in India, such as making payments for local expenses, investments, or loans.
• FCNR Account: FCNR accounts allow NRIs to deposit their overseas earnings in one of the six acceptable currencies such as USD, GBP, Euro, CAD, AUD, and JPY. This account is non-repatriable.

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Inri helps you open NRE/NRO bank account, in a paperless format.

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Step 2: Complete the KYC Process

Before investing in mutual funds in India, NRIs must complete the Know Your Customer (KYC) process. This involves submitting the necessary documents to fulfill regulatory requirements. The required documents typically include a copy of your passport, overseas address proof, Indian address proof, recent photographs, PAN card copy, and bank statement. Additional documents such as a mariner's declaration or certified copy of the Continuous Discharge Certificate (CDC) may be required for merchant navy staff.

Historically, KYC form and documents were needed to be submitted offline to a SEBI registered intermediary either by courier/post and often required attestation by authorised officials or notaries. However, Inri makes this process completely online and gets you started on KYC in less than 5 mins.

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Step 3: Choose the Investment Method

NRIs have two main methods for investing in mutual funds in India:

A. Self or Direct Investment

NRIs can choose to manage their investments themselves and carry out transactions through normal banking channels. They need to specify whether the investment is on a repatriable or non-repatriable basis in their application. To invest directly, NRIs can register their profiles on online platforms like Inri and get started on their investments.

B. Power of Attorney (PoA)

Alternatively, NRIs can authorise someone else to invest on their behalf by granting a Power of Attorney (PoA). The PoA holder will be able to make investment decisions and carry out transactions on behalf of the NRI investor. Both the NRI and the PoA holder must sign the KYC documents to enable this type of investment.

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Step 4: Invest in Mutual Funds

Once the account is set up and the KYC process is completed, NRIs can proceed to invest in mutual funds. They can choose from a wide range of mutual fund schemes offered by various AMCs in India. It's advisable to consult with financial advisors or wealth managers to select schemes that align with their investment goals, risk appetite, and time horizon. Online platforms and apps, provide a convenient way for NRIs to invest in mutual funds personalized to their country of residence and investment goals.

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Mutual Funds for NRIs

NRIs from countries other than the US and Canada have more flexibility when it comes to investing in mutual funds in India. They can invest in any mutual fund schemes available in the Indian market without specific restrictions. This opens up a wide range of investment opportunities for NRIs from countries such as the UK, UAE, Australia, Singapore, etc. Thorough research and professional advice are recommended to identify the best-performing mutual funds that align with their investment objectives.

Index funds are usually the default option to get started in mutual funds. Read more about top performing Indian index funds here.

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Taxation on Mutual Funds for NRIs

Taxation is an important aspect to consider when investing in mutual funds as an NRI. Let's explore the key taxation points for NRIs investing in mutual funds in India:

Capital Gain Tax

Profits from investment in mutual funds are taxed as capital gains for NRI investors. The following table lists the tax rates and holding times for several types of mutual funds:

Equity-oriented Mutual Funds:

• Short-term Holding (less than 12 months): 15% tax on short-term capital gains
• Long-term Holding (12 months and more): 10% tax on long-term capital gains without indexation benefits

Debt-oriented Mutual Funds:

• Short-term Holding (less than 36 months): Tax as per applicable income tax slab
• Long-term Holding (36 months and more): 10% over and above Rs 1 lakh without indexation

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TDS (Tax Deducted at Source)

NRIs who make investments in mutual funds must pay Tax Deducted at Source (TDS) in India. On long-term capital gains, the TDS rate for debt and other non-equity funds is 20%.

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Elimination of Double Taxation

Over 90 nations, including the US and Canada, have signed the Double Taxation Avoidance Agreement (DTAA) with India. NRIs who previously paid taxes for their mutual fund earnings in India may be eligible for tax reduction in their home nation under the DTAA. This avoids double taxation and ensures that NRIs are not taxed twice on the same income.

In conclusion, NRIs have the opportunity to invest in mutual funds in India and benefit from the growth potential of the Indian market. By following the steps outlined in this guide, completing the necessary documentation, and adhering to tax regulations, NRIs can make informed investment decisions and potentially achieve their financial goals. It's advisable to seek professional advice, conduct thorough research, and ensure a well-diversified portfolio to maximise returns.

If you're specifically interested in small-cap mutual funds, read more about the Top Small-cap Mutual Funds For NRIs In 2024.