NRI Investment in Mutual Funds: Process & Regulations

Last Updated: 25 Jun 2024

When it comes to investments in mutual funds, it is not just citizens of India who have a right to invest. Even NRIs are entitled to make investments in India. Are you an NRI planning for mutual fund investment in India? Then read this article to know more about the process and regulations.

Getting Started with NRI Investment in Mutual Funds in India

India is an emerging economy where maximum foreign investment takes place. The stocks, mutual funds, debentures, securities not only interest the citizens of India, but it also interests the NRIs. Around the world, the most prominent investors are from UAE, the UK and the USA, wherein one-third of the units are bought by the NRI population living in the countries mentioned above.

A mutual fund is a popular choice among NRIs because of its benefits such as diversification, liquidity, easy returns, professional management etc. The investment is overseen by investment expert who strategically invests the pool of money, collected from different investors, in financial instruments/assets to generate maximum returns. Mutual funds for NRIs comprise of the same options – equities, bonds, securities, stocks – that are available to regular Indian citizens.

Key highlights of NRI investment in Mutual Funds

• Access to a diversified portfolio of financial instruments

• Dividends earned are exempt from taxes

• NRIs are entitled to redeem open-ended funds on demand

Mutual fund investment process for NRIs

 

The mutual fund for NRIs is governed by the Foreign Exchange Management Act (FEMA) 1999. If you’re an NRI looking to invest in mutual funds market in India, then you must open either NRO or NRE account. If you’re a novice or an experienced investor, you can invest in capital markets such as stocks, dividends, exchange-traded funds (ETFs) and mutual funds, subject to terms and conditions.

Here’s tabular information to know the difference between NRO and NRE account

NRO account	NRE account
Allows you to save foreign earnings in Indian banks. The earnings are converted into Indian rupee, depending on the exchange rate in India	To save income generated in India from sources like room rent, dividends, etc.
The account is taxable	The account is tax-free
Can only be partially repatriated	Can be freely repatriated

Methods to Invest in Mutual Funds

There are two methods through which you can start investing in mutual funds.

• Direct investment

  You can directly invest in mutual funds provided you have any of the two account types. Before starting the investment, you should submit KYC documents, these include:

  1. Passport copies

  2. Pan Card copies

  3. Address proof

  4. Latest Photo

  5. Certified bank statement

   

  Once you complete the paperwork, a face-to-face verification is conducted by the Indian Embassy in the resident country.

• Power of Attorney

  You can make use of Power of Attorney (POA) who will be you representative in carrying out mutual fund investments. The investment will be made along with someone who is a resident of India. The fund house will carry out in-person verification of the POA.

Things to Consider Before NRI investment in Mutual Funds

• The returns from a mutual fund are taxed. Short-term capital gains or STCG has a tax rate of 15%, while long-term capital gains or LTCG exceeding Rs. 1 lakh per year are taxed at 10%

• Short-term gains from debt funds are taxed at the rate of 30%, and if an NRI continues to invest in the mutual fund for over three years, then the tax rate applicable is 20% without indexation. However, long-term gains from debt funds are taxed at 10% without indexation.

• As long as you’re an NRI, you have the right of repatriation considering the amount you invest, and the money earned

• Submission of proof of the residence is mandatory

Bottomline on NRI Investment in Mutual Funds

NRIs investing in mutual funds can easily keep track of investments online – be it buying, redeeming, switching, systematic transfer or online withdrawal. Asset Management Companies (AMCs) also keep you informed about portfolio disclosures. If you’re an NRI looking to invest in mutual funds, you can earn attractive profits from rupee appreciation. The investment will be a rough ride in the initial stages, but you can definitely reap good returns in the long-run.