Can NRIs Invest in Mutual Funds? An In-Depth Guide for Global Investors

The prospect of high returns, a diverse range of investment options, and professional fund management makes mutual funds in India an attractive choice for global investors seeking to grow their wealth.

Moreover, India's financial markets have matured significantly, offering a well-regulated environment under the Securities and Exchange Board of India (SEBI). For NRIs earning in stronger currencies like USD, EUR, or GBP, investing in Indian mutual funds not only diversifies their portfolio geographically but also allows them to benefit from favourable currency arbitrage.

The increasing ease of online investing platforms and transparent processes has further simplified mutual fund investments, making them accessible and appealing to NRIs worldwide.

However, while the opportunities are abundant, investing in mutual funds in India as an NRI requires understanding the legal framework, tax implications, and operational procedures.

This guide aims to provide NRIs with a comprehensive overview, helping them make informed decisions as they explore the dynamic landscape of Indian mutual funds. It unpacks everything an NRI needs to know about mutual fund investments in India, from the legal framework to the opportunities and challenges.

Can NRIs Legally Invest in Mutual Funds in India?

Yes, NRIs can legally invest in Indian mutual funds under the guidelines laid out by the Foreign Exchange Management Act (FEMA), 1999. However, the investments must be routed through designated NRO (Non-Resident Ordinary) or NRE (Non-Resident External) accounts maintained with authorized banks in India.

Key points to consider:

• NRE Accounts: Investments made via NRE accounts are fully repatriable, including the principal and gains.

• NRO Accounts: Investments made through NRO accounts are non-repatriable, although the income earned can be repatriated up to a certain limit as per RBI guidelines.

How NRIs Can Start Investing in Mutual Funds

To begin investing, NRIs need to follow a systematic process. Here's a step-by-step guide:

1. Complete KYC Formalities

KYC (Know Your Customer) compliance is mandatory. NRIs must submit documents such as:

• A valid passport and visa.

• Overseas address proof (utility bills, rental agreements, etc.).

• PAN (Permanent Account Number) card.

Some fund houses require In-Person Verification (IPV), which can be completed online or through an authorized representative.

2. Choose the Right Bank Account

NRIs must link their mutual fund investments to an NRO or NRE account. Repatriation and tax implications depend on the type of account chosen.

3. Select a Fund and Investment Mode

NRIs can invest through:

• Lump Sum Investments: A one-time investment, ideal for those with a substantial corpus.

• Systematic Investment Plans (SIPs): Small, regular investments, perfect for mitigating market volatility over time.

4. Appoint a Power of Attorney (POA) (If Required)

NRIs who cannot manage investments independently can appoint a trusted POA to operate their mutual fund account.

5. Choose Between Direct and Regular Plans

• Direct Plans: Offered by fund houses without intermediaries, these have lower expense ratios.

• Regular Plans: These involve intermediaries like brokers or financial advisors who may charge a commission.

Popular Types of Mutual Funds for NRIs

1. Equity Funds

Equity funds are ideal for long-term growth. They invest in stocks and are suitable for NRIs willing to take calculated risks for higher returns.

2. Debt Funds

Debt funds invest in fixed-income securities like government bonds, debentures, and money market instruments. These are less volatile and suitable for risk-averse investors.

[Read: Global Investment Opportunities: Best International Mutual Funds to Consider for 2025]

3. Hybrid Funds

Combining equity and debt, hybrid funds offer a balanced risk-return profile, making them suitable for moderate-risk investors.

4. ELSS (Equity Linked Savings Scheme)

ELSS is a tax-saving mutual fund with a mandatory three-year lock-in period. It provides the dual benefit of wealth creation and tax deduction under Section 80C.

5. Index Funds and ETFs

These funds replicate the performance of a market index like the NIFTY 50 or S&P BSE Sensex. They are passively managed and have lower expense ratios.

Taxation of Mutual Fund Investments for NRIs

The taxation landscape for mutual funds held by NRIs underwent notable changes in July 2024. Let us understand the revised tax regulations and examine their long-term implications for NRI investors.

1. Equity-Oriented Funds

• Short-Term Capital Gains (STCG): Gains from investments held for less than 12 months are taxed at 20% an increase from the previous 15%

• Long-Term Capital Gains (LTCG): The tax rate for LTCG gains has risen from 10% to 12.5%. The exemption amount has also been revised and increased from Rs 1 lakh to Rs 1.25 lakhs.

2. Debt-Oriented Funds

• STCG: Gains from investments held for less than 36 months are taxed at the NRI's income tax slab rate.

• LTCG: Gains from investments held for over 36 months are taxed at 20% with indexation benefits.

Challenges and Considerations for NRIs

1. Tax Residency Complications

NRIs must carefully evaluate their tax residency status to avoid double taxation. Consulting a tax advisor is highly recommended.

2. Country-Specific Restrictions

Some countries, like the USA and Canada, impose stringent regulations (e.g., FATCA compliance) that make it challenging for NRIs to invest in Indian mutual funds.

3. Currency Risk

Fluctuations in the Indian Rupee's value against foreign currencies can impact returns for NRIs.

4. Repatriation Process

While NRE investments are fully repatriable, the process can be cumbersome and time-consuming.

Trump 2.0 Era: What It Could Mean for NRI Investments in India

The possibility of Donald Trump returning to the U.S. presidency in 2025, often referred to as 'Trump 2.0,' has sparked discussions on how his policies might influence global markets, including the financial interests of Non-Resident Indians (NRIs). Trump 2.0 era is expected to have both direct and indirect effects on NRIs and their decisions to invest in Indian mutual funds.

One critical aspect is the potential impact on U.S. tax policies. Trump's earlier administration had introduced sweeping tax reforms, including the Tax Cuts and Jobs Act of 2017. If similar policies resurface, NRIs based in the U.S. may find changes in their disposable income or taxation on global earnings, which could alter their capacity to invest in Indian mutual funds.

On the other hand, a stronger U.S. dollar often associated with Trump's economic policies could benefit NRIs, enabling them to convert their earnings into Indian rupees at a more favourable rate, increasing their purchasing power while investing in India.

[Read: How Donald Trump's Victory Would Playout On the Indian Equity Market]

A renewed focus on 'America First' policies might prompt NRIs to diversify their wealth into Indian assets as a way to hedge against uncertainties in the U.S. economy. Additionally, any geopolitical tension or new trade agreements under Trump 2.0 could have ripple effects on emerging markets like India, potentially influencing mutual fund performance in sectors tied to exports or global trade.

NRIs must also consider how these policies might interact with India's economic environment, which remains resilient and investor-friendly. With the Indian government focusing on reforms and infrastructure development, mutual funds tied to sectors like manufacturing, technology, and healthcare are well-positioned to deliver attractive returns.

For NRIs, this dual interplay of U.S. policy changes and India's growth story presents both challenges and opportunities when deciding how to structure their mutual fund portfolios.

Understanding the broader implications of Trump 2.0 will be vital for NRIs to make informed decisions. Staying updated on tax treaties between the U.S. and India, monitoring currency fluctuations, and assessing sector-specific growth in India can help NRIs navigate this evolving landscape with confidence.

To conclude...

For NRIs, investing in Indian mutual funds could be a strategic way to participate in India's economic growth while achieving financial goals. Although the process involves a learning curve, the rewards can be substantial. With proper planning, compliance, and professional guidance, NRIs can unlock the immense potential of mutual fund investments in India and enjoy a diversified, high-return portfolio.

The key lies in understanding the regulatory framework, selecting the right funds, and aligning them with your financial objectives. India's mutual fund market is not just an opportunity it's a gateway to building wealth for the future. So, if you're an NRI wondering whether to take the plunge, now might just be the perfect time to start your investment journey.

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MITALI DHOKE is a Research Analyst at PersonalFN. She is an MBA (Finance) and a post-graduate in commerce (M. Com). She focuses primarily on covering articles around mutual funds including NFOs, financial planning and fixed-income products. Mitali holds an overall experience of 4 years in the financial services industry.
She also actively contributes towards content creation for PersonalFN’s social media platforms in the endeavour to educate investors and enhance their financial knowledge.
 

Disclaimer: Investment in securities market are subject to market risks, read all the related documents carefully before investing.
This article is for information purposes only and is not meant to influence your investment decisions. It should not be treated as a mutual fund recommendation or advice to make an investment decision in the above-mentioned schemes.