How can an NRI invest in mutual funds in India?

In United States, most of the registered mutual fund companies, which have their operations in India, do not generally accept investments from Indians, who are presently living in US as they have to maintain a cap on the number of non-resident investors they can take.

Dodd-Frank Wall Street Reform and Consumer Protection Act of US require fund managers to register with the regulator and follow their rules, in case the fund managers are handling more than 15 US-based investors' account. This means that if a fund house acquires more than 15 NRIs then, they have to get registered with the regulator and follow their rules. Hence, to avoid this, many fund houses don’t generally accept investments from NRIs. Therefore, such NRIs can invest in Indian markets via US-based mutual funds, which are India specific. However, doing so may not give you better diversification benefits as such funds are very limited.

If NRIs wish to invest in India then, they can do so by following a few steps, which are mentioned below. However, before investing, it is very important to know certain legal things.

According to Foreign Exchange Management Act (FEMA) 1999, an NRI is a person, who is either a citizen of India or a person of Indian origin, residing outside India.

As per India’s new rule of residency, if a person has not resided in India for a period of 120 days or more or a person’s stay in India is more than 60 days but less than 120 days in a financial year, even if their stay in India is more than 365 days in a preceding four financial years then, he or she is a non-resident Indian. The required stay has been reduced from 182 days to 120 days. A person also qualifies as an NRI if he has been deputed overseas for more than six months.

Post understanding the above facts, a question arises as to how to get started with investing? It is important to take note that all the investments that an NRI makes must be in rupee terms. Hence, for this purpose, an NRI needs to open either Non-Resident (External) Rupee Account (NRE Account) or Non-Resident Ordinary Rupee (NRO) Account or Foreign Currency Non-Resident (FCNR) Account with an Indian bank.

If you wish the money that you invested along with gains to be repatriated to your country of residence then, you should open an NRE account. If you wish that the investment that you are making must not get repatriated to your country of residence then, you should open an NRO account and if you wish to hold funds in a foreign currency then, you should open an FCNR account.

There are two ways, through which, one can invest. First, the investment amount can be directly debited from your NRE or NRO account. Second, you as an NRI need to give a rupee cheque or draft from his NRE or NRO account or he may also send a rupee cheque or draft issued by an exchange house abroad, which is drawn on its correspondent bank in India.

Remember, if an investment is made through cheque or draft, then you must attach Foreign Inward Remittance Certificate (FIRC), which is a proof that the payment has been received by an individual from outside the country in a foreign currency or a letter issued by a bank that will confirm the source of funds along with the application form.

When it comes to redemptions, all the redeemed amounts are payable in rupees only. The payment is either made through cheques or even can be directly credited to the NRI investor’s bank account.

As explained earlier, investments along with its appreciation and dividend earnings are fully-repatriable only in the case of NRE and FCNR accounts. In the case of NRO accounts, only the appreciation of investments is repatriable and not the principal amount.