A Complete Guide on How NRIs Can Invest In Mutual Funds in India

With the Indian economy projected to maintain robust growth, mutual funds allow NRIs to participate in this upward trajectory without the complexities of managing individual stocks. By pooling resources with other investors, mutual funds provide access to professionally managed portfolios that can diversify risk while maximising potential returns. 

Whether you are interested in equity funds for higher growth or debt funds for stability, there is a suitable option for every investor. In this guide, we will cover crucial topics such as the investment process of mutual fund investment for NRIs, necessary documentation, tax implications, and tips for choosing the best mutual funds.

How Can NRIs Invest in Mutual Funds?

If you are wondering, ‘Can NRIs invest in mutual funds?, NRIs can invest in mutual funds in India through two primary methods: directly using an NRE (Non-Resident External) or NRO (Non-Resident Ordinary) account or by granting a trusted resident of India the Power of Attorney (PoA) to manage investments on their behalf.

Under FEMA (Foreign Exchange Management Act), NRIs are individuals residing outside India and less than 120 days in a financial year in India. FEMA regulations determine the eligibility of NRIs to invest in mutual funds and the applicable capital gains tax, making it crucial to understand these guidelines before investing.

To facilitate investments, many asset management companies (AMCs) and platforms offer streamlined online processes for NRIs. These services make it convenient for NRIs to diversify their portfolios through equity, debt, or hybrid mutual funds while adhering to regulatory requirements.

Suitable Types of Mutual Funds for NRIs

Here is a table comparing the most popular types of mutual funds investment options for NRIs:

Steps for NRIs to Invest in Mutual Funds

Here are a few steps that make mutual funds investment for NRIs possible:

• Open an NRE/NRO Account

Mutual funds do not accept investments in foreign currency, and FEMA regulations prevent NRIs from depositing their funds in a regular savings account. Therefore, they must open either an NRE or NRO account, depending on which best suits their needs.

An NRE account is ideal for NRIs wanting to transfer their foreign earnings to India. An NRO account is used by NRIs to deposit money earned in India, as it cannot be easily converted back into foreign currency.

• Make your Investments

There are two ways an NRI can invest in mutual funds:

• Direct Investment: Here, an NRI makes transactions through basic banking intermediaries. They have to provide valid details such as a duly updated KYC, PAN card, passport copies and address proof of residency outside India. There can be face-to-face verification initiated by banks in the Indian embassy of that country. 
• Power of Attorney:  NRIs can allow a third-party member who is a residential citizen to make investments on their behalf. Both NRI and POA’s signatures must be present on the KYC documents.

• Complete your KYC

An NRI must complete the KYC before investing in mutual funds. This process will require them to provide several documents and pass some verification tests. Many mutual funds are sceptical about accepting investments from the US and Canada because of their complex compliance requirements under the Foreign Accounts Tax Compliance Act (FATCA).

• Redeem Your Mutual Fund

You will receive your principal along with gains in your NRE/NRO account as the AMC credits it. However, different fund houses have separate procedures for fund redemption.

Documents Required for KYC Process of Mutual Funds Investment

To process mutual funds investments for NRIs, they will have to present some documents for their KYC.

• Passport: A valid and updated passport is required for identification of the NRI.
• Visa: An NRI has to provide a visa or any other residential proof of the location.
• Foreign Address Proof: NRIs have to provide address proof of their foreign residency such as bank statements, rental agreements and locational utility bills.
• PAN Card: A PAN card is necessary to carry out taxation obligations in India.
• Recent Photo: KYC processing may require a few passport-size photos for various reasons.
• Face-to-Face Verification: In some cases, NRIs may have to visit the Indian embassy in their country to get additional verifications.

Tax Implications For NRIs in Mutual Funds

Here are the mutual funds taxation for NRIs when looking for how can NRIs invest in mutual funds:

The following table highlights the Tax Deducted at Source (TDS)

Important Points to Remember for NRIs When Investing in Mutual Funds

Here are a few pointers NRIs must keep in mind when investing in mutual funds:

1. If you provide only your foreign bank account details, your request will be rejected.
2. Your right to repatriate both your capital and investment gains applies only while you maintain NRI status.
3. Upon fund maturity, applicable taxes will be deducted at the source before the amount is credited to you.
4. The Common Reporting Standard (CRS) is a global framework to combat tax evasion. You must verify your tax residency in any of the 90 countries that are CRS signatories.
5. The USA and Canada have stricter compliance regulations. Under the FATCA Act, financial institutions are required to report the transaction details of U.S. citizens.

Final Thoughts

Mutual funds are a widely preferred investment option across the country. NRIs, in particular, can benefit from additional gains when the rupee appreciates against their home currency. However, the reverse scenario can also impact returns. When approached strategically, mutual fund investments for NRIs can be highly rewarding. 

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