How NRIs can invest in Indian mutual funds

Mutual funds have emerged as an attractive investment vehicle for non-resident Indians (NRIs) keen on participating in India’s booming economy.

Unlike direct investment in stocks, which involves cumbersome account setups, regulatory complexities, and high costs for Portfolio Investment Scheme (PIS) or Non-PIS demat accounts, mutual funds offer a streamlined and cost-effective alternative.

Mutual funds also allow a person to spread risk across market caps, sectors and asset classes, providing NRIs with professionally managed portfolios and long-term growth potential without the intricacies of managing individual stocks.

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Here's the Mint step-by-step guide to help NRIs invest in mutual funds online.

The know-your-customer (KYC) process

It's the first and most essential step for NRIs to invest in Indian mutual funds, as mandated by the Securities and Exchange Board of India (Sebi).

NRIs must be present in the country to complete the KYC process. "This requirement has been a significant hurdle for NRIs who cannot frequently travel to India," said Dipen Shah, CFP and founder of NRI FinOne.

It has left many NRIs with limited options, forcing them to delay their investments or rely on third-party intermediaries, wealth management firms, or local banks offering to complete the KYC process.

However, per the 2023 Sebi Master Circular on KYC norms for the securities market, NRIs can complete the KYC process online after coming to India.

According to the circular, the online KYC process for NRIs is to be facilitated through apps developed by Sebi-registered intermediaries. These apps must include features such as live photograph capturing, scanning of officially valid documents (via Digilocker), and video verification in a live environment.

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The process will also include random actions initiated by the app to ensure the interactions are not pre-recorded, with time-stamping and geo-location tagging to verify that the client is indeed in the country.

Besides, NRIs should know that an Indian mobile phone number is required for OTP validation.

Aditya Birla Sun Life Asset Management Co. Ltd currently allows online KYC registration for NRIs. But no modifications are allowed.

Documents needed for KYC

Commonly required documents include a copy of the passport, permanent account number (PAN), proof of overseas address (visa, utility bill, driving licence), a cancelled cheque or bank statement.

If the applicant is a seafarer, they must also submit a copy of their Continuous Discharge Certificate (CDC).

Furthermore, they must complete the FATCA (Foreign Account Tax Compliance Act) form.

These details should be submitted to the AMC and the KYC registration agency (KRA).

Linking NRO/NRE accounts

NRIs must link a bank account—NRE (non-resident external) or NRO (non-resident ordinary)—in India.

While NRE accounts facilitate the smooth repatriation of funds—both the principal and interest earned on investments—NRO accounts are used for income earned in India and require 15CA and 15CB certificates for repatriating funds.

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A copy of a cancelled cheque or bank statement is essential since "penny drop" validation is not currently supported for NRI accounts.

Once the account is set up, NRIs can invest through respective AMC platforms and access RTA (registrar and transfer agent) platforms such as myCAMS and KFintech. They can also use centralized mutual fund platforms such as MFCentral and MFUtilities, which provide easy online access to various mutual fund houses.

However, NRIs residing in the US or Canada face additional restrictions, as only select AMCs, due to regulatory challenges, allow investments from these countries.

Rules for US and Canadian NRIs

For NRIs residing in the US and Canada, investment choices are further restricted due to additional compliance requirements under US and Canadian laws.

Only a few AMCs—UTI Mutual Fund, Sundaram Mutual Fund, HDFC Mutual Fund, ICICI Prudential Mutual Fund, SBI Mutual Fund, Motilal Oswal, Tata Mutual Fund, Quant Mutual Fund, and Nippon Mutual Fund—permit online investments for US- and Canada-based NRIs.

“For countries other than the US and Canada, almost all AMCs are open to accepting money from NRIs,” noted Shah.

For NRIs residing in the US, investing in Portfolio Management Services (PMS) can often be more tax-efficient than investing in mutual funds, primarily because of the Internal Revenue Service's passive foreign investment company (PFIC) rules.

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Under the PFIC rules, US taxpayers are subject to higher taxes on investments in foreign mutual funds. The tax treatment of income from these funds can lead to significant penalties, including deferred tax liabilities and an additional interest charge.

On the other hand, PMS investments are typically structured differently, often as direct equity or debt investments, which do not fall under the PFIC regulations. As a result, they offer a more favourable tax treatment for US NRIs, as income from PMS is taxed at regular capital gains rates, which are generally lower than those applied under the PFIC regime for mutual funds.

KYC registered vs validated

As of now, NRIs can invest with a ‘KYC registered’ status until April 2025. All NRI investors must ensure their KYC status is upgraded to ‘KYC validated’ by this date. To achieve ‘KYC validated’ status, NRIs must provide an Aadhaar card as proof of address. Those whose status remains ‘KYC registered’ by the deadline must re-submit KYC documentation with Aadhaar-based proof of address.

NRIs without an Aadhaar card may want to consider applying for one before this deadline to avoid last-minute inconveniences.