Can NRI Invest in Mutual Funds India?

As an NRI (Non-Resident Indian), you would have countless investment opportunities back in India. Investing in mutual funds for NRI is among the most popular forms of wealth creation. Now, the question is: Can NRI invest in mutual funds in India? Short answer—yes! However, the process and rules related to investing in mutual funds by NRIs are slightly different from those of the residents.

This article will examine can NRI invest in mutual funds, the kinds of funds available, the legal aspects, and the tax implications. Let’s look in:

What are Mutual Funds?

To understand how can NRI invest in mutual funds, we must first know what they are. A mutual fund is a pool of money collected from several investors to invest in stocks, bonds, or other securities. Professional fund managers manage it. Investors like you buy shares or units in the mutual fund, and the value of your units depends on the performance of the underlying assets in the fund.

Also read: Key Roles and Functions of Mutual Funds for Smart Investing

Investing in mutual funds is very helpful for diversifying one’s investment portfolio. Thus, it can minimise risks compared to investing directly in stocks. It would be an excellent choice for NRIs who want professional management without having the time or expertise to do it themselves.

Key Points NRIs Must Know About Investing in Mutual Funds

Critical points that NRI investment in India needs to know about investing in Mutual Funds:

1. Types of Accounts for NRIs

NRIs can invest in mutual funds through two types of accounts:

• NRE (Non-Resident External) Account: This account is mainly for transferring income earned outside India to India. The funds in an NRE account are fully repatriable so they can be quickly taken out of India. Interest earned in NRE accounts is tax-free in India.
• NRO (Non-Resident Ordinary) Account: This is used to manage income earned in India (for example, rental income, pensions, etc.). The funds in an NRO account are only fully repatriable with restrictions, and interest earned is subject to tax.

NRIs need an NRE or NRO account to invest in Indian mutual funds. The funds from these accounts can be used to purchase mutual fund units, depending on your account.

2. Selecting the Right Mutual Fund

Can NRI Invest in Mutual Funds? NRIs can invest in the same mutual funds that the residents of India invest in. However, one must first evaluate which type of mutual fund would suit one’s financial goals. There are several types of mutual funds, including:

• Equity Funds: Invest in equities and are the best for long-term growth.
• Debt Funds: Invest in bonds and fixed-income securities. These are relatively safer than equity funds.
• Hybrid Funds: A combination of equity and debt funds to achieve a balanced risk.
• Index Funds follow a particular market index, like Nifty 50 or Sensex.
• Tax-Saving Funds (ELSS): These come with tax benefits under Section 80C of the Income Tax Act. Each has its risk-return profile, so it’s essential to pick the right one based on your risk tolerance and financial goals.

3. KYC (Know Your Customer)

The KYC process for NRIs validates one’s identification and address before a person can be accepted by an intermediary or other firm dealing in securities. It applies similarly to residents and NRIs, except the process for NRIs can get a little elaborate.

• A copy of your passport
• A copy of visa/immigration status issued by that country
• Your recent photograph
• Evidence of your current overseas address
• Proof of your current overseas address
• It is mandatory to have a PAN card for all Indian investors

KYC can be done online by KRAs or offline by visiting the mutual fund office.

4. Mutual Fund Investments through a Demat Account

NRIs can also hold units of mutual funds in a demat account. The mutual fund units can thus be held electronically, making the process easy and faster. Though opening a demat account to invest in mutual funds is not mandatory, it is often recommended for ease of transaction and future transfers of units.

5. Online Platforms for NRI Mutual Fund Investment

Investing in mutual funds has been more challenging for NRIs than today. The various websites of the mutual fund houses or platforms, like SMC Global Securities, make it convenient to invest in the correct mutual funds, track the investments, and even redeem them from the comfort of your home.

6. Investment Limits for NRIs

There is no specific limit on NRIs’ investment in mutual funds. However, they are governed by the same regulatory framework as resident Indians. NRIs can invest in equity mutual funds, debt funds, and hybrid funds without any cap on the amount of investment.

7. Fund Repatriation

Repatriation involves returning the funds to their native place. If NRIs have invested in a scheme of mutual funds, they can take this amount with them. A person with an NRO account can also make fund repatriation possible from that account, subject to specific rules and regulation norms set by the RBI (Reserve Bank of India).

It is important to note that though the principal’s investment from an NRE account is entirely repatriable, proceeds from an NRO account are liable for tax deductions at source (TDS), and repatriation is permitted only within specified limits.

NRI Mutual Funds Taxation

NRI mutual fund taxation depends on the type of fund and the duration for which the investment is held. There are two significant taxes involved:

1. Capital Gains Tax: This tax is applicable when you sell your mutual fund units.

• Short-term capital gains: Units sold within 3 years in equity funds or within 36 months in debt funds attract short-term capital gains tax.
• Long-term capital gains: If units of mutual funds are held for periods exceeding 3 years in equity funds or more than 36 months in debt funds, then people are charged at a lower rate.

For equity funds, LTCG above ₹1 lakh in a year is taxed at 10% (without indexation), while STCG is taxed at 15%. LTCG is taxed at 20% with indexation benefits for debt funds, and STCG is taxed at the investor’s income tax slab.

• Dividend Tax: Dividends from mutual funds are subject to tax at the applicable rates based on the investor’s income slab.
• Tax Deduction at Source (TDS): The mutual fund company may deduct tax at the source when units are redeemed or NRIs receive dividends. The TDS rate may vary depending on whether the income is derived from a debt or equity fund.

Steps for NRI Investment in India

To start investing in mutual funds, follow these simple steps:

1. KYC Process: Complete the KYC (Know Your Customer) process by submitting the necessary documents to the KYC Registration Agency (KRA).
2. Open an NRE/NRO Account: To facilitate your investments, open an NRE (Non-Resident External) or NRO (Non-Resident Ordinary) bank account in India.
3. Select the Right Mutual Fund: Choose a mutual fund that matches your financial goals, whether you’re looking for growth, income, or a mix of both.

Advantages of NRI Investment in India

Investing in mutual funds offers several benefits for NRIs. Here are some of the key advantages:

• Diversification: Mutual funds pool money from different investors and invest in stocks, bonds, and other assets. This helps spread the risk, so if one investment doesn’t do well, others may perform better, reducing your overall risk.
• Professional Management: Experts handle your investments when you invest in mutual funds. These fund managers have the knowledge and experience to make intelligent investment decisions on your behalf.
• Liquidity: Mutual funds are easy to buy and sell. Subject to the fund’s rules, you can withdraw your money when needed.
• Tax Benefits: Some mutual funds, like Equity Linked Savings Schemes (ELSS), offer tax-saving options. These funds help you save taxes under Section 80C of the Income Tax Act, which can lower your tax bill.

Mistakes NRIs Should Avoid While Investing in Mutual Funds

Although investing in mutual funds can be very profitable, here are some common mistakes that NRIs should avoid:

• Not Understanding Risk: Different mutual funds come with different levels of risk. It’s important to know whether you’re investing in high-risk funds like equity funds (which can go up and down a lot) or safer options like debt funds (which are more stable).
• Ignoring Taxes: Different mutual funds are taxed in different ways. If you don’t understand how taxes apply to your investments, you could pay more than you expect.
• Not Tracking Investments: It’s essential to check your investments regularly. If you don’t monitor them, you may miss out on making changes that could help you earn better returns.
• Overlooking Exit Loads: Some mutual funds charge fees if you sell your investment before a certain period (known as “exit loads“). Be aware of these charges before you invest.

Conclusion

Yes, NRIs can invest in mutual funds in India. The process is simple and provides diversification and professional investment management, but NRIs must understand the legal aspects, taxes, and repatriation processes. So, with proper procedures and the right selection of funds, NRIs can increase their wealth without forgetting their Indian roots.

Mutual funds are an excellent supplement to any investment strategy, whether you want long-term capital growth or a stable income.

Frequently Asked Questions – FAQs

1. Can NRI invest in mutual funds in India?

Yes, NRIs can invest in mutual funds in India without any restrictions on the investment amount. There is no limit or cap on how much money an NRI can invest in mutual fund schemes across categories like equity, debt, hybrid etc.

2. What types of accounts can NRIs use to invest?

NRIs need to have a rupee-denominated Non-Resident External (NRE) or Non-Resident Ordinary (NRO) bank account in India to invest in mutual funds. An NRE account can be used to invest money earned abroad, while an NRO account is meant for income earned in India.

3. Is KYC mandatory for NRI investors?

Completing the Know Your Customer (KYC) process is mandatory for NRIs before investing in any mutual fund house in India, just like it is needed for resident Indian investors. An NRI must submit key identification and address documents per KYC regulations.

4. What are the tax implications on mutual funds for NRIs?

Depending on the holding period, NRIs must pay short-term or long-term capital gains tax on returns from debt and equity mutual funds. Tax deducted at source (TDS) is also levied on dividend payouts. Tax treaties may impact the tax liability in certain cases.

5. Can NRIs invest in direct plans of mutual funds?

Yes, NRIs can invest in direct plans of mutual funds, which have lower expense ratios as they do not involve payouts to distributors. Direct plans allow investors to invest directly with the fund house, cutting distribution costs.

Author: All Content is verified by SMC Global Securities.