How an NRI can Invest in Direct Mutual Funds without any Hassles?

A citizen who moves abroad to look for a brighter future and attains the status of a Non Resident Indian (NRI) is still interested in the fortunes of the country. Apart from the cultural and political happenings in India, an NRI is also keen on the change in the country’s attractiveness as an investment destination. Whether they have plans to come back to their homeland one day or not, they do have intentions in partaking in the country’s success.

Given that India is one of the largest emerging markets with a robust investment infrastructure as well as bright economic prospects, it is unsurprising to know that the country is an exciting prospect for wealth creation for an NRI. And one of the easiest way to do that is to choose the mutual fund route.

A primary question to ask, though, is whether they can invest in Indian mutual funds in the first place?

The Answer is Yes

Unlike some investment avenues like government schemes or even direct equities, investing in Indian mutual funds is neither off limits nor requires an approval from the Reserve Bank of India (RBI) or the Securities and Exchange Board of India (SEBI). It is important, however, for an NRI to take care that the investment is in adherence with the Foreign Exchange Management Act (FEMA).

How can an NRI invest in Indian mutual funds via direct schemes?

Expense in an important aspect to look at for any investor as it eats into his returns. Investors can see how expensive their mutual fund scheme is by looking at its expense ratio. Thus, it is advisable to choose a fund with lower expense ratio among those which follow a similar investment strategy.

In order to lower the cost of investing in mutual funds, market regulator SEBI had released a circular in September 2012 directing Asset Management Companies (AMCs) to provide a separate plans for direct investments which are not routed through a distributor. This was done for both new as well as existing schemes.

The primary feature of direct investment is that is has a low expense ratio and no commission is paid from it. Further, such investment has a separate Net Asset Value (NAV) as well.

After this circular was released, fund companies have started offering regular and direct plans for all schemes.

An NRI can invest in direct plans like any other resident. The main difference is that he cannot do so in foreign currency as Indian fund houses do not accept payments in any unit apart from the Indian rupee. An NRI needs to decide whether the investment needs to be done on a repatriable basis or non repatriable basis. Also, for making investments in the rupee he needs to open either a non resident external (NRE) or non resident ordinary (NRO) account with an Indian bank. Funds in an NRE account are repatriable whereas those in an NRO are non repatriable. Such an investor can also open a Foreign Currency Non Resident (FCNR) account.

An asset is considered repatriable if it can be moved from an account in a foreign country to the country of residence or citizenship of an investor. For instance, while cash is repatriable, real estate is not. Repatriation laws of a country can determine whether a foreign investor can invest in a country or not.

Once an NRE, NRO or FCNR account has been opened, it can be used to carry out investment in direct plans of mutual funds. An application form should include KYC (Know Your Customer) details as well as indicate whether the investment being done is on a repatriable or non repatriable basis.

The documents that are required to be furnished with the application form are bank statement, overseas residence proof, photograph(s), PAN (or a substitute thereof), and any other identification required by the AMC. A copy of the passport is mandatory. In case the payment for the investment is made via a draft or cheque, a Foreign Inward Remittance Certificate (FIRC) is required to be presented as well. In lieu of the FIRC, an investor can present a letter from his bank confirming the source of funds.

The fund house may also require an in-person verification (IPV). This can be completed by a visit to the nearest Indian Embassy or a similar representative office. If so required, documents can be verified during the IPV as well.

Apart from making the investment directly with the AMC himself, an NRI can also make use of the Power of Attorney (PoA) facility offered by Indian mutual funds. By using it, he can allow someone else to make investments in direct mutual funds as well as take other decisions related to the portfolio. It is important to note, though, that both the NRI and the individual holding the PoA must sign on the application documents in order to make investments.

Alike investment, the redemption process is quite similar to that for a resident. The fund house may either issue a cheque after receiving the redemption request or directly credit the amount to the linked NRE or NRO account. The payment will only be in Indian rupees and in case of the NRI having marked the investment as non repatriable, then the proceeds will be credited only in an NRO account.

If Investing from US or Canada

If an NRI is investing from US or Canada, it is important to note that the compliance requirement in these two nations is much more stringent than others.

The Foreign Account Tax Compliance Act (FATCA) and the Bank Secrecy Act (BSA) are two main regulations which require US persons to report foreign financial accounts and asset holdings. Also, the US imposes taxes on income earned from overseas which disincentivises repatriation.

Due to these compliance regulations, only a few Indian AMCs accept investment from NRIs based out of these countries. Thus, they should take care to understand the impact of these regulations on their income as well as get to know the fund houses whose schemes they can invest in.