Can NRI invest in mutual funds? A comprehensive guide

To say that mutual fund investments in India are growing steadily would be an understatement. Over the past decade, investors have favoured mutual funds as an investment avenue. This has brought a considerable jump in the total Assets Under Management (AUM) of the mutual fund (MF) industry. The size of the mutual fund industry has grown more than 6X times between 2013 and 2023, helping it grow from Rs 8.26 trillion on 31 December 2013 to Rs 50.78 trillion by 31 December 2023.

Attractive returns, expert fund management, range of schemes, liquidity, tax benefits, etc., are some of the reasons that drive the popularity of mutual funds. Every investor wants a slice of the MF action, including Non-Resident Indians (NRIs). But can NRIs invest in mutual funds?

What do FEMA rules say?
 

The FEMA (Foreign Exchange Management Act) governs NRI investments in India. Regarding mutual fund investments, FEMA allows NRIs and PIOs (Persons of Indian Origin) to invest in such schemes in India. However, you would have to adhere to the FEMA rules to invest. Let’s check out the rules so that investment in mutual funds becomes a breeze.

Also read - Some unconventional yet popular avenues for NRI investments in India

FEMA rules for NRI investment in mutual funds
 

Given below are some important rules and regulations that you must follow when investing in mutual funds in India –

KYC (Know Your Customer) verification

Just like resident Indians, you, too, would have to complete the KYC verification process before you can invest in mutual funds. KYC verification involves the submission of important documents, some of which include the following –

- Identity proof

- Address proof of the country where the NRI is residing

- Age proof

- Copy of passport

- Copy of visa

- PAN card or Form 60

- Bank statement

- Recent photographs

The KYC verification process can be done online. However, some mutual fund companies might insist on an in-person verification. In such cases, you can visit the Indian embassy in your country of residence and complete the verification.

Foreign Inward Remittance Certificate (FIRC)

The FIRC becomes relevant if you invest via a cheque or demand draft. In such cases, the FIRC should be attached to the cheque/demand draft, which confirms the source of the funds being invested in the mutual fund scheme. In the absence of FIRC, a bank letter is also acceptable.

Foreign Account Tax Compliance Act (FATCA)

FATCA is applicable if you are residing in the United States of America (USA). The USA makes it mandatory for its residents to disclose their financial transactions. If you reside in the USA, you should comply with FATCA norms when investing in MFs (Mutual Funds).

How do you invest in mutual fund schemes?
 

Now that you know the basic FEMA rules about mutual fund investments, let’s understand the investment process detailed below -

Choice of a bank account

Once you become an NRI, you will need an NRI bank account for your transactions. You can choose from two types of NRI accounts – the Non-Resident Ordinary (NRO) Account or the Non-Resident External (NRE) Account. Here's what you should know about them -

• Both the accounts are rupee-denominated, allowing investments into mutual funds
• The NRO account attracts tax on the interest earned, while the NRE account gives tax-exempted returns
• Repatriation from the NRO account is allowed up to $1 million in a financial year, while NRE accounts allow free and limitless repatriation

Choose a suitable bank account for mutual fund investments, depending on your transactions and needs. 

Pro tip - Mutual funds don’t accept investments in foreign currency. You will have to convert your foreign income into Indian Rupee (INR) when investing in mutual funds, and your bank accounts help you do just that.

Mode of investment

As an NRI, you can invest in mutual funds in two ways –

Direct investment

You can directly invest online into chosen mutual fund schemes through your bank account. Here's how -

- If you have a Demat or a broking account with an Indian broker, you can use the account for mutual fund investments

- You can also visit the Asset Management Company’s (AMC) official website and invest online in a desired scheme

- Alternatively, if you are visiting India and want to invest in mutual funds, you can invest offline through a mutual fund broker or the branches of the AMC

Investing through a PoA (Power of Attorney)

Giving a PoA to a resident Indian is another way of investing in MF schemes. Here's how –

- You can draw up a PoA in a trusted individual’s name and instruct them to invest on your behalf

- The individual would then invest in the chosen MF schemes in your place

- However, when completing the KYC formalities, your and the PoA holder’s signatures would be mandatory

Redeeming mutual funds
 

You can redeem the mutual fund investments whenever you want. Redemptions can be done online or offline, and the funds are transferred to your NRE or NRO bank account after deducting the applicable tax.

The redemption amount is credited to the NRO bank account if you have chosen non-repatriable investments.

Taxation on redemption
 

If you earn a return from mutual fund investments, such returns would be taxed. The tax implication would depend on the type of fund selected and the holding period. Here’s how –

• Returns from equity funds are taxed at 15% if held for less than 12 months
• Equity returns up to Rs 1 lakh are tax-free if held for 12 months or more
• Returns exceeding Rs 1 lakh are taxed at 10% if held for 12 months or more
• Gains from debt funds are taxed at the income tax slab rates irrespective of the holding period

Metra Trust NRI Banking solutions – Your perfect investment partner
 

Metra Trust NRI Banking solutions provides a gamut of services to aid NRI investments. Here’s what you get –

• NRI bank accounts offering interest up to 7.25% p.a. with monthly credits
• Zero charges on all commonly used savings account services
• Instant Portfolio Investment Scheme (PIS) investment
• App-based investment management
• A dedicated relationship manager for all your needs
• 24X7 digital banking

Also read - NRI outward remittance: How to send money home without commissions?

Begin your investment journey today!
 

With this simple NRI investment guide, mutual fund investments would become easy. So, assess your risk appetite, plan an investment strategy, and start investing in mutual funds. Choose from the different scheme options and build a diversified portfolio. Open an Metra Trust NRI Account to make investments easy with an advanced digital platform, a dedicated relationship manager, and easy online investing.