NRI's who are interested in taking advantage of the growth of the Indian economy have the option if investing in their NRE or FCNR accounts via term deposits or into mutual funs (MF).
What is a Mutual Fund? It is a corpus of money pooled into one by a large number of investors who have a common objective. MF's have fund managers who invest the corpus of funds into different equity or debt instruments based on the objective of the fund. Equities are primarily the shares traded on various stock exchanges or commodity exchanges. Debt instruments are generally debentures or bonds or similar instruments which are in effect extending the debt burden of the invested company. In India the MF's are governed by the rules and regulations as set by the Securities and Exchange Board of India (SEBI). The basic types of Mutual Funds are Equity Funds, Balances Funds, Debt Funds and Equity Linked Saving Scheme (ELSS).
Equity Funds are those, where the investment in equity is around 70-90% of the fund corpus, Debt Funds are those where the majority of the corpus is invested in debt instruments, Balanced Funds those which balance the investment in equity and debt and ELSS is mainly for tax saving purposes and has a lock in period of 3 to 5 years.
The average return on MF's for a holding of minimum 3-5 years is approx. 15-18% in normal market conditions. At times when the market conditions in India are low the returns expected can be around 8-10% and at times of boom there are no bounds to the returns the MF's can fetch. There have been times in the past that the MF's has fetched a return between 35 -50%.
One can invest into the MF's as a one-time investment or on a monthly or periodic basis, also known as a Systematic Investment Plan (SIP). Similarly, one can redeem the investment all at once or in small pieces called Systematic Withdrawal Plan (SWP). One can also repatriate the investment in MFs including the capital invested and the capital appreciation as long as they are still classified as an NRI at the time of redemption. Redemptions are paid in Indian Rupees only and the investor is responsible for any loss or gain that may arise on the account of any foreign exchange fluctuation, should they wish to convert the Indian rupees into any other currency. The transfer from India to abroad is done by the bank and not by the Mutual Fund company.
Due regulations under FEMA and SEBI, not all mutual fund houses allow investments from NRI's, however, there are some that still do. These are:
When it comes to investing in mutual funds, the tax liability of the non-resident is the same as that of a resident Indian. If an equity fund is sold beyond one year of holding, then it becomes tax-free. For the purpose of taxation balanced funds are treated the same as equity funds. debt funds have the advantage of indexation and Long Term Capital Gains at the time of sale, if done beyond the specified holding period of 3 years.
NRI's also have the option of investing in NRE Account Term Deposits, FCNR Account Term Deposits and NRO Account Term Deposits. The NRE & NRO Accounts can be a general account as opposed to a term deposit account however, CNR Accounts are mandatorily Term Deposit accounts. The rate of returns on these instruments depend on the bank in which the specific account is opened, but is generally much lower than that of MF's. One can repatriate the funds under the term deposits made under NRE and FCNR accounts. NRI's can also avail of loans in their favor or a 3rd party, outside of India from the subsidiaries or correspondents of the banks where they have opened these term deposits in India however; loans are not permitted on the NRO Fixed Deposits. These accounts can be operated by a registered power of attorney on behalf of the non resident.