Any enterprising person is always on the look out for investments that give high returns with minimal risk. It goes without saying, higher returns come with higher risk. But even in the same category of risk, there are better performing investments. Investing in mutual funds in India is one such investment.
In this article
- Why Should NRI Invest in Mutual Funds in India?
- How Can NRI Invest in Mutual Funds in India?
- What Is a Mutual Fund?
- Types of Mutual Fund
- Ways to Invest
Why Should NRI Invest in Mutual Funds in India?
There are several reasons why mutual funds are ideal investments for most NRI. The following are a few reasons:
1. Indian Growth
A young, English speaking population along with a reformative government are some of the factors that have allowed India to become the fastest growing major economy.
India has what’s known as a demographic gift. Half of India’s population is under the age of 25. This presents India with an opportunity China had a few decades. China’s young population allowed it to become the factory of the world. Now, China’s population is aging. All eyes are gradually moving towards India.
An advantage India has over China is an English speaking population. In fact, this reason alone has caused various large companies to set shop in India. They get cheap labor which is easy to communicate with.
Demonetisation, Goods and Services Tax (GST), Foreign Direct Investment (FDI), reduction in paperwork involved in various stages of registering a business, – the government has been very pro-active in improving the ease of doing business in India.
These and various other factors have all contributed to India becoming the fastest growing major economy in the world.
2. Better Investment Option
Mutual funds have been performing spectacularly in recent times. They also allow you to start investing with very small amounts.
NRI used to invest in the real estate market of India very heavily. Off late, however, the real estate market has not been performing very well. There is a surplus of houses. The price buyers are willing to pay is much lower than what the houses are listed at. Once thought to be a safe and high returns investment, real estate has shown very reduced growth, especially since 2011.
Gold, another favorite of Indians within India or abroad, has not just stagnated but also shown negative growth in the past few years.
Mutual funds in that light offer far higher returns when compared to the above two investments. And not just the above two but more too.
Another added benefit mutual funds have over most other investment vehicles is that you can start investing with an amount as little as ₹500.
3. Low Effort and Time
Directly investing in the equity/stock market or other investment vehicles require a lot of time in research and analysis. Mutual funds are far simpler.
Investing in stocks, bonds, securities, and other channels requires great skill and hard work. Mutual funds consist of large teams that are responsible for various aspects of investing. For one person to master all such skills is challenging, and needless to say, time-consuming.
Researching and finding a mutual fund in comparison is far easier. You need to find a fund that suits your investment needs and matches your risk appetite. When you invest in a mutual fund you can assume you have outsourced investing. The experts at the mutual fund do the heavy-lifting for you. You as an investor just have to monitor the fund’s performance from time to time (not very regularly) to make sure it still matches your needs.
4. Easy and Convenient
Investing in mutual funds is very easy and convenient. You can do so from anywhere in the world.
You should invest in mutual funds using our platform – groww.in. We at Groww offer a platform to research, buy, track, and sell mutual funds. The entire procedure – right from registering to investing in mutual funds and redeeming your investments – is completely online. Not only everything online, it is also paperless. You will not be required to send or receive any physical documents.
We are an online mutual fund distributor registered with Association of Mutual Funds in India (AMFI). All sensitive data is protected by a 256-bit encryption and is completely safe.
All of which means you can invest in mutual funds from anywhere in the world at any time you wish with complete peace of mind.
With mutual funds, diversification is automatic. Mutual funds are managed in a manner so as to ensure reduced exposure to risk.
Investing in a single instrument too much is very risky. If something negative occurs, you could suffer losses. To avoid such a situation, it is recommended that people diversify their investments. What that means is that investments should be distributed across different vehicles. By doing so, you are reducing the risk you are exposed to as the chance of a greater number of investments suffering losses together is low.
If you invest in stocks, bonds, etc yourself, you must take care to ensure that your investments are diversified. Not just that, you must also regularly monitor your investments and get rid of poorly performing and high-risk assets.
Tha advantage with mutual funds is that you do not have to concern yourself with any of this. Mutual funds by their nature spread out investments and ensure diversification. For example, an equity mutual fund usually has anywhere between 45 and 90 different companies’ shares in their portfolio. So if you invest in a mutual fund, your investment is already quite diversified.
However, investing in too many mutual funds or over-diversifying doesn’t necessarily shield you better from risk. It can, however, reduce your returns. Though each person’s financial condition is different, there is a recommended number of mutual funds you should invest in.
6. Double Taxation Avoidance Agreement (DTAA)
India has a DTAA with 85 countries. DTAA ensures you don’t pay excessive taxes in India as well as the country of your residence.
Different mutual funds have different taxes on them. For example, equity mutual funds have a 15% tax on gains made in less than a year from an investment. For investments exceeding a year, there is no tax. How much tax you pay in the country of your residence depends entirely on the local laws.
What a DTAA ensures is that you don’t get taxed twice. This is better understood with the help an example.
Example: Capital gains in India are taxed at 15% while the same is taxed at 30% in the USA. Since India has a DTAA with the USA, you will have to pay a tax of 15% in India, and in the USA, you’d have the pay the difference in tax. Since you’ve already paid a 15% tax in India, you’ll be required to pay a tax of only 15% (30-15=15) in the USA.
How Can NRI Invest in Mutual Funds in India?
There are a couple of requirements NRI need to invest in mutual funds in India.
1. Account Type
An NRE, NRO, or FCNR account is required.
NRE: Non-Resident External Rupee (NRE) account allows for complete repatriability and is tax-free in India too.
NRO: Non-Resident Ordinary Rupee (NRO) account allows for the balance in such an account to be repatriable up to a limit of USD 10 million. The interest earned is taxable at 30%, deducted at source.
FCNR: Foreign Currency Non-Resident (FCNR) account allows for free repatriability of the principal and interest. There is no tax charged on the interest.
2. Documents Needed
No special permits are required. Regular documents you’d anyway have with you will be enough.
Here is a list of documents needed:
- Picture: A recent picture of yourself – soft copy/digital format will work.
- PAN Card: Upload a self-attested photo copy of your valid PAN card.
- Passport: Upload a certified copy of the same.
- PIO/OCI Card: Upload a self-attested copy of the same.
- Proof of Residence and Permanent Address Proof: Can be of any nation.
- Bank Statement: A copy of one month’s bank statement. This has to be of the same bank account from which you wish to invest from.
What Is a Mutual Fund?
A mutual fund is a scheme that pools money from investors and grows them by investing in various investments vehicles. There are various types of mutual funds.
Mutual funds are investment scheme that collects funds from different investors. The funds are managed and invested professionally. Every mutual fund is managed by one or more fund managers (also known as portfolio manager).
This portfolio manager makes investments in bonds, stocks, short-term money market, and different commodities to grow the fund. The money they invest is put into different assets classes that reflect the investment principle of the mutual fund.
Types of Mutual Fund
There are various types of mutual funds. Some of them are:
Equity Mutual Fund:
These mutual funds invest in stocks or equity. They are considered to be of higher risk when compared to many other types of mutual funds. Within equity mutual funds too, there are more types. Based on the market capitalization or size of the companies they invest in, mutual funds can be categorized as large-cap, mid-cap, or small-cap.
Debt Mutual Fund:
These mutual funds invest in bonds. They are considered to be of low risk and yield stable returns.
Sectorial Mutual Fund:
These mutual funds are very specific in the way they invest. Sector mutual funds invest in stocks/equity of companies belonging to only a certain sector/industry.
They are deemed very risky because of their very focused nature. Only people with good knowledge of a certain industry should invest in such funds.
Mutual funds are increasingly becoming very popular. Resident Indians are investing record amounts in mutual funds. NRI too are investing like never before. The reason for their popularity is because they offer a high number of advantages over other investments. Some of them are:
Investing, be it in shares, real estate, gold, bonds, and so on depends on a plethora of factors that constantly need to be monitored.Mutual funds are managed by qualified and professional people.
Thus, to ensure your money is invested in the right places, you only have to choose the right mutual fund. That is much easier when compared to a situation where you are constantly monitoring your investments.Once invested in a mutual fund, your only task would be to periodically monitor the fund. This is to ensure the fund’s performance and your expectation are aligned.
Investing in mutual funds is much easier than investing directly in equity. The effort on your part is while selecting the right mutual fund for yourself.Mutual fund dealers allow you to compare the funds based on metrics such as level of risk, return, and price. Because the information is easily accessible, you, the investor, is able to make wise decisions.
Liquidity basically refers to the ability to be able to convert your assets to cash with relative ease.If you own a house and need cash, how long would it take for you to sell the house and get cash in hand? It could take anywhere from a few weeks to a few months.
Mutual funds are considered liquid assets since there is high demand for many of the funds in the marketplace. Since this is the case, you can retrieve money from a mutual fund very quickly. Usually, in about 2-4 days.
Mutual funds are of several types. Some have a higher risk associated with them while offering the possibility of a higher return (small-cap equity mutual funds).
At the same time, there are mutual funds that are more stable – offering lower but more consistent returns (debt funds).There are funds that offer good returns in the long term while at the same time, some funds are good to invest for a short duration. The sheer variety on offer accommodates all types of investment needs.
Ways to Invest
There are broadly two ways to invest in a mutual fund:
1. Lump Sum
This refers to investing a given amount of money in one go. Often, such amounts are relatively large amounts of money. Investing lump sum has an advantage in that the entire amount of money is subjected to growth simultaneously.
2. Systematic Investment Plan (SIP)
This is the other method of investing that has gained great popularity. SIP requires you to invest a fixed amount of money every month in a mutual fund of your choice. The amount is automatically deducted every month from your linked account. SIP is ideal for people who want to save and invest from their regular income/salary.
Based on various, investing lump sum or via SIP might be ideal for you. You should carefully study your financial situation before opting for either method.
Mutual funds in India present great opportunities. Start investing today!
Currently, Groww does not support NRI investment.
However, you may refer to our site, Groww.in, if you want to gauge more knowledge about mutual funds
Disclaimer: the views expressed here are those of the author. Mutual funds are subject to market risks. Please read the offer document before investing.