NRI Investments in Mutual Funds

With stock picking, not being everyone’s cup of tea, Mutual Fund investments by Non-Resident Indians (NRIs) definitely score over direct stock investments, giving them abundant opportunity to participate, and benefit from the emerging Indian economy. With a professional Fund Manager having access to exhaustive research reports coupled with extensive technical and fundamental analysis, managing their money, mutual investments are attractive for NRIs looking to invest in their ‘home economy’.

The mutual funds are managed by Asset Management Companies (AMC) in India, which manages the assets of the mutual fund and also makes investment decisions for the fund. Mutual Funds are regulated by the Stock Exchange Board of India (SEBI) and/or Reserve Bank of India (RBI), in case an AMC is promoted by a bank.

The performance of a scheme is measured in terms of Net Asset Value (NAV) which is the market value of all the securities held by that particular scheme. NAV per unit denotes the total market value of all the securities held divided by the number of units of that scheme available. The NAV of every scheme varies on the day-day basis and each fund house has to declare the NAV of all its mutual fund schemes at the close of business every day. The Fund house is bound to declare the (NAV) of direct plans and retail plans separately.

How should NRIs invest in Mutual funds?

NRIs are allowed to invest in all categories of Mutual Funds in India on both repatriable and non-repatriable basis. As per regulations, before starting any investments in mutual funds in India, mandatory Know Your Customer (KYC) has to be done for NRIs. KYC is a one-time process and will be valid across all AMCs, once completed. Additionally, NRI investors in Mutual Funds have to get an In-Person Verification (IPV) done, in which an authorized person verifies the aforesaid documents in the presence of the NRI. This can be done at any registered office of AMCs or of the distributor, if NRI is present in India or by any authorized official of overseas branches of Indian banks or by the Indian Embassy/Consulate General in the country of residence. Mutual Funds can be purchased either through a distributor or through a Registered Transfer Agent (RTA) or directly from the Fund House/AMC.

Types of Mutual Funds

Each AMC has multiple mutual fund schemes which have different attributes of investment nature, risk profile and investment philosophy. At the highest level, mutual funds are categorized into Open-Ended Schemes, Close-Ended Schemes and Interval Schemes.

Open-ended Schemes – These funds are open to investors to buy and sell on a continuous basis. The applicable NAV per unit for that business day is considered for buy/sell transactions.

Close-ended Schemes – These funds have a fixed unit capital and sell only a specific number of units. The units have to be purchased when the AMC issues the units as a New Fund Offer (NFO) for a specified time period. No units can be bought after this period and also, the exit is not allowed till the term of the investment expires. However, to facilitate early exit, close-ended schemes are listed on stock exchanges where it can be traded.

Interval Schemes – These funds allow buying and selling at pre-specified intervals. No transactions are allowed between two specified terms.

Mutual Fund schemes are also classified based on the nature of investment and investment philosophy. Before an NRI invests in Mutual Funds, it is important to understand the investment philosophy of the funds, risk profile and restrictions on buying.  SEBI regulations make it mandatory for all AMCs to grade their schemes in the terms of the risk level. The five risk levels as indicated by SEBI are low, moderately low, moderate, moderately high and high and this should be represented pictorially in the form of “Risk-o-meter” on all the related forms of the scheme. Below is the broad classification of Mutual Fund Schemes:

Equity/Growth Funds – These funds carry high risk and have more than 60% exposure to equity. Equity funds with exposure mainly to a particular sector are called Sectoral Funds. Equity funds following a particular index are called Index Funds. Equity Funds which invest in shares depending on the market capitalization of the companies are called Small Cap Funds if investing is predominantly on smaller companies, MidCap Funds if investing is predominantly in mid-size companies and Large Cap Funds if investing is predominantly in large companies. If a Fund invests in companies of irrespective of market capital, it is called Diversified/Multicap Fund.

Debt Funds – In a Debt Fund, the investments are predominantly in debt instruments, Corporate deposits, debentures and government securities. These funds carry low risk and are classified as either low or moderately low risk on “Risk-o-meter”.  The funds which invest mainly in Government securities are called Gilt funds, funds which are mostly invested in long-term bonds (3-10 years) are called Long-Term Bond Funds/Income Funds, funds which invest mostly in short term bonds (6 months -3 years) are called Short Term Bond Funds and Ultra Short Term Funds are funds which invest mainly in debt instruments with very short maturity period (15 days – 6 months).

Hybrid Funds – These funds carry moderate risk and invest in a mix of equities and debt instruments. If the equity exposure in a fund is more than 50%, it is called a Balanced Fund and if the debt exposure is more than 80%, it is called as a Monthly Income Plan (MIP).

Restrictions on NRI investments in Mutual Funds

NRIs residing in Europe, UK, Hong Kong, Australia and Middle-East have no restrictions to investing in any of the Indian Mutual Funds. However, residents of Canada and US are restricted from investing in Indian Funds by most AMCs. Under Foreign Account Tax Compliance Act (FATCA), it is mandatory for all financial institutions to share the details of all transactions of US citizens/NRIs to the US government. Also, the US law requires that any fund manager who manages more than 15 US based investors to be registered with the US regulators and comply with all the US regulations. As a consequence, any schemes of AMCs accepting investments from US based NRIs will have dual regulators and also, they will have to follow a cumbersome and an extensive reporting process to the US government. However, some of the AMCs have come up with schemes adhering to the regulations of both countries, thus allowing NRIs to invest in mutual funds.

Modes of Investment and Redemption

Investment: For open-ended schemes, Mutual Fund investments can be done either as a lump sum or as a Systematic Investment Plan (SIP). SIP is a periodic contribution of a fixed amount over a fixed period of time. Depending on how the gains made from the mutual fund investments are paid out, the schemes are classified as

  1. Growth Option – In this, the invested capital is allowed to grow and any sale of assets held by the Fund Manager is reinvested.
  2. Dividend Option – In this, a dividend is paid out to the investor at suitable intervals decided by the Fund Manager.
  3. Dividend Reinvestment Option – In this, the dividend paid out is reinvested back into the scheme and new units are allotted to the investor with the purchase price being the NAV after dividend declaration.

The NAV of a scheme varies depending on the above options also. For close-ended schemes, only lump sum investments are allowed.

Redemption: For open-ended schemes, the units can be redeemed in full or partially either in direct mode or through the distributor. The NAV considered for redemption would depend on the nature of the schemes and the time of submission of the redemption request.

The investment and redemption options for NRI investors of Mutual Funds are similar to that of Residents.

Charges on Mutual Fund Investments

Exit Load – This is a one-time charge applicable during redemption. The exit load varies from 0.5%-3.0%,  depending on the nature of the scheme and the holding period of the units. Exit load is usually not charged, if the holding period exceeds the specified period.

Transaction Charges – This one-time charge is applicable when investments above 10,000 INR are made and is paid to the distributor or the intermediary who sold the investment.

Fund Management Charges – This is a recurring charge which is calculated based on the Daily Net Assets of the Mutual Fund Scheme. The expenses are deducted from the scheme every day and NAV is declared net of expenses. This charge varies depending on the asset size of the scheme and the nature of the scheme.

Funds purchased through distributors (retail plans) may deduct higher fund management charges as the commission has to be paid to them and direct plans come at slightly cheaper price than their retail counterpart.

Repatriation of investments in Mutual Funds

All investments made from Non-Resident External (NRE) /Foreign Currency Non-Resident (FCMR) accounts of NRIs can be repatriated provided the funds invested were from the remittances from earnings abroad. If investments were made from Non-Resident Ordinary (NRO) accounts, it cannot be repatriated.

Taxability of Mutual Funds

Mutual Funds are taxed based on the nature of the scheme and the duration of the investment.

Equity Funds – All schemes with more than 60% exposure to equity are considered as Equity Funds for tax purpose. The gains made on redemption of mutual fund units are tax-free if the holding period is more than a year. If the units are redeemed within a year of purchase, a Short-Term Capital Gain (STCG) Tax is applied at 15% of the gains.

Debt Funds – All schemes which have more than 80% exposure to debt instruments are classified as Debt Schemes for tax purpose. The gains made on redemption is taxed as Long-Term Capital Gain (LTCG) of 20% if the holding period is more than three years. If the units are sold within three years of purchase, it is taxed at the marginal rate i.e. applicable tax slab rate.

All applicable taxes are deducted at source (TDS) for all NRIs at the highest income tax rate and the value net of tax is disbursed.