India’s Mutual Fund market isn’t just growing—it’s becoming a powerhouse of investment opportunities. Mutual funds are a great avenue for Non-Resident Indians (NRIs) to diversify their portfolio, and generate wealth, while also staying connected to India’s economic growth story. However, the legal and regulatory requirements make the process daunting for so many. 

In this guide, we break down the investment process step by step from the basics, tax implications, and practical tips to make it smooth sailing.

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Why Mutual Funds are a Good Choice for NRIs?

Mutual funds are investment portfolios that pool money from various investors, to invest in the stock, bonds, or any other securities. For NRIs, mutual funds offer several benefits:

• Ease of Access: Thanks to modern digital platforms, people can invest and manage their portfolios irrespective of their location.
• Diverse Options: From equity to debts, and hybrid funds, investors can use    mutual funds to build wealth, reduce risks, or look for regular income.
• Professional Management: The fund managers consistently monitor the market to optimise returns, taking the burden away from investors

The mutual fund market in India stood at over ₹46 trillion in 2023 and had a CAGR of 17% over the past decade. Using mutual funds, NRIs have been able to invest in some of the country’s high-growth sectors, such as Information Technology, pharmaceuticals, and infrastructure—areas that have been some of the major growth drivers.

Eligibility Criteria for NRIs to Invest in Mutual Funds

To invest in mutual funds in India, NRIs are required to meet certain essential criteria. According to FEMA, an NRI is an Indian citizen who has been living in another country for employment, business, vocational or any other activities or for any other purpose in that country and has continued to be an Indian citizen; or is registered as an overseas citizen of India.

Requirements for Investment:

• PAN Card: It is compulsory to have a PAN, or Permanent Account Number, for any financial transaction in India.
• KYC Compliance: Know Your Customer (KYC) process involves all investors including the NRIs providing identification, address proof and a FATCA self-certification.
• Bank Accounts: Anyone interested in investing has to open an NRE (Non-Resident External) or an NRO (Non-Resident Ordinary) account.

Types of Investment Accounts

NRIs can use either of the following accounts, based on their repatriation needs:

NRE Accounts:

• Ideal for funds that need to be repatriated to the investor’s country of domicile.
• Tax-free principal and interest in India

NRO Accounts:

• Suitable for managing income earned within India like rental income or dividends.
• The developed funds are non-repatriable beyond a certain extent, and the interest formed therein is also taxable.

Modes of Investment

NRIs can invest in mutual funds through:

1. Direct Investment:

• It is very easy to invest directly through online portals or the website of the concerned AMC.
• There are AMCs out there that offer video-based KYC making it easy to onboard customers.

2. Authorised Distributors:

Distributors are intermediaries and in most instances, they offer other related services.

3. Power of Attorney (PoA):

NRIs are allowed to give a Power of Attorney to a local person in India to manage their investment. It gives the PoA holder the ability to conduct transactions provided they meet the KYC checks.

Steps to Start Investing

Here’s a step-by-step guide for NRIs to begin their mutual fund investment journey:

1. Open an NRE or NRO Bank Account:

Choose an account depending on whether you need repatriation benefits.

2. Complete KYC Formalities:

Photocopy and sign an attested copy of your passport, visa and the address proof where you reside overseas. FATCA compliance is a must for US-based NRIs.

3. Select the Right Mutual Fund Scheme:

Make decisions based on your financial objectives, risk tolerance, and the investment period. For example:

• Equity Funds: When you put your money at high risk, targeted for high return.
• Debt Funds: Low-risk, steady income.
• Hybrid Funds: Taking a balanced approach to risk and return.

4. Invest and Monitor:

Invest with a large amount of money or with a recurring amount through SIP. With digital platforms, it’s easy to analyse the performance and adjust as needed.

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Tax Compliances for Non-Resident Indians

Taxes form a central component of investment in mutual funds by NRIs. Here’s a breakdown:

1. Equity Mutual Funds:

• Short-term gains (holding <1 year): Taxed at 20%.
• Long-term gains (holding >1 year): It charged at 10 % of the amount, which is beyond ₹1 lakh.

2. Debt Mutual Funds:

• Short-term gains (holding <3 years): Subject to Indian Income Tax at the tax rate applicable under the income tax slab regime.
• Long-term gains (holding >3 years): Imposable to a 20% tax with indexation privileges.    

3. TDS (Tax Deducted at Source):

• TDS applies to both short-term gains and long-term gains, however, the excess amount can be claimed through tax returns.

Pro Tip: Get advice from a tax consultant to know the prospects of getting rid of double taxation through the Double Taxation Avoidance Agreement (DTAA).

Challenges Faced by NRIs

While mutual funds offer numerous benefits, NRIs may encounter challenges such as:

1. Currency Fluctuations:

Fluctuations in exchange rates may make an impact on returns particularly if made on a revenue basis.

2. Regulatory Compliance:

In particular, it needs scrupulous compliance with FEMA and FATCA regulations. The good news is that by hiring a professional advisor, the process can be made a lot easier.

3. Higher TDS Rates:

NRIs are subjected to higher tax deduction rates than the resident Indians, it will influence short-term liquidity.

4. Access to Information:

It becomes challenging to know how our funds are performing, and what the market trends around the globe are. Choose reliable portals, which will provide you the detailed insights.

Relevant Statistics

• More than 60 per cent of NRIs prefer SIPs, valuing the discipline and cost-effectiveness of the approach to investing.

• Hybrid schemes also remain popular; NRIs invest 45% of their total money in equity funds.

Practical Tips for NRIs

• Diversify Globally: Although there is a great opportunity in mutual funds in the Indian market, you should hedge your bets so to speak by investing in funds from other countries.

• Set Clear Goals: Whether you’re investing for retirement, or your child’s education or wealth build-up, define your objectives to choose the right funds.

• Monitor Regularly: Monitor your investment online through apps, or web portals and adjust if necessary

In Conclusion

NRIs have a simple and effective way to invest in India’s economic growth by investing in mutual funds. With the knowledge about its legal requirements, taxation and investment strategies NRIs can deal with it confidently. With adequate planning and support, including mutual funds in your financial portfolio can work wonders for growth and stability.

Seize the moment, and invest in the Indian mutual funds arena. Be it an equity, debt or hybrid fund; every investment choice you make will make you one step closer to your financial goals while keeping in tune with the growth story of India that you are now a part of.