ATM :: A complete guide for NRIs investing in Mutual Funds

Traditionally, NRIs have been more comfortable investing in real estate in India. Real estate investment gave returns in the country at an average of about 14-17% in this decade.
Kripananda Chidambaram, Director , | Dec 27, 2012, 03.07 PM IST |


Traditionally, NRIs have been more comfortable investing in real estate in India. Real estate investment gave returns in the country at an average of about 14-17% in this decade. Sensex returned 19% in the decade and top performing diversified equity mutual funds have given returns in the range of 25-30%. Though past performance cannot be a pure indicator of future performance, but the pattern will stay true if the Indian economy grows in the 8-9% range in the next decade. So it makes good sense to get a life beyond real estate!

In absolute amount it does make a huge difference!

Mutual funds are a good alternative to real-estate.

Can NRIs invest in mutual funds?
Non Residents Indians and Persons of Indian Origin can invest in mutual fund schemes in India. In case of NRIs no special approval is to be sought from authorities such as the RBI. They can invest in mutual funds on repatriable basis or non-repatriable basis. To invest on a repatriable basis you must have an NRE account or FCNR account with a bank in India. In this case the investment money should be remitted through usual banking channels or from the NRE/FCNR account of the NRI investor. Investment can be made on a non-repatriation basis as well with investment funds being provided from NRO account or NRE/FCNR account of the investor.

What are mutual funds?
A mutual fund is an indirect way to invest in stocks or fixed deposit. Without going too much into the essays, all you need to understand is that investing through mutual funds can be more beneficial and simpler than directly investing in stocks or fixed deposits.
The schemes that invest in shares are called as Equity Mutual Funds and schemes that invest in fixed deposits like instruments are called as Debt Funds. A mix of both is called as Hybrid Funds.

How to choose a mutual fund?
First thing you always need to do before deciding on the fund. Determine time- By when you would require the money. If you require the money within 3 years call it as short-term. If you may require the money between 3-5 years call it as mid-term and anytime above 5 years call it as long-term.

Follow the simple thumb rule:
• The investment is for short-term, then go for debt funds
• The investment is mid- term, then go for hybrid funds
• The investment is for long-term, then go for equity funds

The rationale behind this is as follows:
Debt funds provide safety of capital but the returns are relatively low. Investments that are for shorter period, priority is safety of capital over returns hence debt funds are preferred.
Equity funds gives you scope to make higher returns provided they are invested for longer periods. For investments that are long-term, inflation is the major cause of worry. Equity funds have the power to blunt the effects of inflation.

Long-term goals
Equity mutual funds are further divided to cater to different segments of people.

Further to identify the type of equity fund suitable to you:
Define-The purpose of the investment. If the purpose of the particular investment is to meet life goals higher education, retirement, marriage, purchase of home, etc call it as core needs. If it is for general wealth creation call it as satellite needs.

To choose the appropriate equity fund to meet your long-term need follow these simple rules:
In case you are investing for core needs then choose a diversified large cap fund or an index fund
In case you are investing for satellite needs then choose either a thematic or sector fund.

You can go for a maximum of 3 mutual fund scheme. The basis for this thumb-rule goes back to our experience with mutual funds. Three well chosen diversified mutual funds (or index funds) give you all the diversification you need. Any more only add to your complexity, and likely lower your returns. These three funds are useful for beginners and pros alike, since the fund managers are experts who are dedicated to manage your money well.

For an NRI the procedure of applying in a mutual fund is similar to the one followed by residents. The completed application form must be submitted at the investor service centers along with cheques or bank drafts. Details of the Indian bank account of the investor must be furnished at the time of application. Alternately online application can be made. Investment cannot be made in foreign currency. Rupee cheques drawn from the investor’s bank account in India or from abroad payable in a bank in India or Rupee drafts purchased abroad payable at the city where the application is made must be provided. Usual facilities like nomination, appointing Power of Attorney is available for NRI investors as well.

Redemption proceeds are paid in Indian Rupees by cheque to the account number provided at application. For select banks they may credit proceeds to the account directly. If investments are made on non-repatriable basis redemption proceeds will be credited to the NRO account of the investor. Similarly if a person turns an NRI after purchasing of units the maturity proceeds will not qualify for repatriation. However dividends are fully repatriable in all cases.

Tax Treatment
Mutual fund units are treated as capital assets and attract capital gains tax in India. If held for more than 12 months long term capital gains tax is applicable and for periods less than that short term capital gains tax is applicable. No tax is to be paid on dividends received. Indexation benefits are available for long term capital gains. TDS applies on capital gains tax. TDS certificate or Form 16 A is dispatched to the investor along with redemption warrant. Mutual fund units do not attract wealth tax.

The summary of income tax rates applicable for NRIs on mutual funds for the year 2013-2014 is below

Fund Type Short Term Capital Gains Tax Long Term Capital Gains Tax
Equity 15.45 % Nil
Debt 30.9 % 20.6 % (with indexation)


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