What NRIs need to know before investing in Mutual Funds?

The mutual fund route is gradually getting popular among non resident Indians (NRIs) as it facilitates an easy method of participating in the equity growth story without taking undue risk and without having to bother about tracking your portfolio. While most funds have the facility of permitting NRIs to also invest, there are some basic things NRIs must be aware of. While these may sound to be quite fundamental and simplistic, NRIs need to be aware of these minor items to that disappointments can be avoided in the future.

Ensure that an NRI applicant already has a PAN number…

Today the Income Tax Department issues permanent account numbers (PAN) to both resident Indians and non-resident Indians. Many NRIs who do not file returns in India do not bother to apply for their Indian PAN number. Remember, NRIs are not permitted to invest in Indian mutual funds if they do not have a PAN number issued by the Income Tax Department. The PAN is a must even if the NRI in question is not filing his returns in India. Mutual funds do not accept applications from NRIs if they do not already have a PAN number. As an NRI it is essential to have a PAN number issued by the Income Tax department and mention the PAN number in your application form. Otherwise your mutual fund application is liable to be rejected.

There is a TDS for NRIs as per the Income Tax Act…

When a resident Indian applies for a mutual fund and earns capital gains on sale of units, the onus is on him to ensure that the capital gains tax are paid to the Income Tax department before the stipulated date. In case of an NRI, the tax treatment is slightly different. The registrar of the mutual fund (CAMS or Karvy as the case may be) is required to ensure that the Tax Deduction at Source (TDS) is deducted before paying out the redemption proceeds to the NRI. Of course, if the NRI is eventually not liable to pay the tax then he can always apply for a tax refund from the Income Tax department. But unlike in case of a resident Indian, the NRI’s tax on capital gains will be deducted at time of redemption itself.

Ensure that your bank account reflects your NRI status…

An NRI bank account is tagged separately by your bank as opposed to your resident accounts. When a person acquires his NRI status, they normally do not bother to change the status of their Resident Account status to an NRI account status. Remember, an NRI can only apply through a specified and dedicated NRI account, which could be an NRE account, NRO account or an FCNR account. If you try to apply for mutual funds as an NRI but your bank account is still tagged as a resident Indian account, then your MF application is likely to be rejected. Since the bank account is central to all your mutual fund investments, ensure that your NRI status is updated first and foremost in your bank account before you apply for Indian mutual funds.

NRIs also need to go through comprehensive KYC…

Mutual fund investments by resident Indians entail a comprehensive Know Your Client (KYC) procedure. The same comprehensive KYC applies to NRIs too. The NRI can download the KYC form from the mutual fund website or from the Point of Sale (POS). The same can be filled and submitted with all documents to the POS or can be mailed to the mutual fund. An NRI opting for KYC needs to furnish his certified true copy of the passport, certified true copy of the overseas address as well as his permanent address. Any documentations or attestations that are in a foreign language need to be translated into English before submissions. Such documents can be attested either by the Consulate or by the overseas branches of the scheduled banks registered in India.

Special approval in case of certain geographies…

While the NRIs based in Middle East may have a much easier route, the compliance is much more strict if the NRI is based in the US or Canada. In case of certain funds which have foreign ownership, applications cannot be invited from certain geographies like the US and Canada for example. Such applications are likely to filtered and rejected right away. Most funds clearly disclose this fact in their prospectus and NRIs need to consult their advisor or the specific fund for clarification on these points.

Mutual funds do offer NRIs an easy and efficient way to access the Indian markets. However, there are some statutory and compliance requirements that NRIs need to familiarize themselves with. The above points are a basic primer for NRIs looking to invest in India and can go a long way in avoiding disappointments and rejection of mutual fund applications.

FORM

How to get 100% value out of your systematic investment plan (SIP)

The systematic investment plan (SIP) has been a great mutual fund tool to create wealth over the long term. This has been consistently proved; both intuitively as well as statistically. However, one needs to keep in mind certain basic issues while designing the SIP. Some basic points will go a long way in ensuring that you get 100% value for your SIP.

Take at least a 5 years perspective…

An SIP is all about rupee cost averaging. Therefore to get the benefit of returns, you need to get the average cost in your favour. When markets are volatile, it often happens that in the short term your SIP may underperform the index. Remember, an SIP is not designed to give you bumper returns over the very short term. Ideally, the time frame for a SIP should be a minimum of 5 years. If you keep a 5 years perspective and stick to quality funds you will easily outperform the index over a period of 5 years. If you take a short term view and keep switching your SIP from one scheme to another, you will end up getting the worst average price in your funds.

Pigeonhole your SIP to specific goals…

The whole idea of an SIP is to help you meet your long term goals. The only difference is that in an SIP the market also plays along on your side so your contribution will be much lesser over a period of time. But there is still a risk that your SIP may be at cross purposes to your goals. How do you resolve that? The answer lies in pigeonholing your SIP to specific goals. Let us say that you require 3 lakhs after 3 years for a Swiss Holiday; Rs.4 lakhs after 4 years for your car’s margin money and Rs.10 lakh after 7 years to pay margin money on your apartment. You can dedicate specific SIPs for each of these needs. They may either be the same fund or different funds; that is entirely a decision you can take along with your financial advisor. The fact of the matter is that the more well defined your goals are, the easier it is to design an SIP to achieve these monetary targets.

Don’t get stuck to a standard SIP for a long time…

This is a mistake that most investors in an MF SIP commit. They assume an Rs.10,000 investment per month and never bother to increase their SIP amount even when their incomes increase. This defeats the basic purpose of an SIP. The idea of an SIP is that you try to keep your savings ratio constant and in fact also increase it over a period of time. When you keep your SIP amount constant, then your savings ratio actually goes down when your income grows. Ensure that your SIP savings grow in tandem with your income. That will mean that some of your goals get front-ended and you will be able to accommodate more goals within your investment. This is a very important step as it makes the best contribution of your income towards your savings when your income level is growing. Ensure that your savings also grow proportionately with your income level.

There should be a fit between your cash flows and your SIP…

You must ensure that your SIP does not get you into a liquidity crunch. If you are working and get your salary on the 1^st of each month, then ensure that your SIP data is set at around the 5^th. If you are in business and you have cash flows coming in spasmodically, then try to be conservative and design a weekly SIP. Also keep the SIP amount to match your assured income and not your variable income.

When in emergency, SIP should be your last fallback…

We have already discussed this point briefly when we spoke about long term investments. This point is a lot more specific. Many of us have the tendency to dip into our SIP savings as they are liquid and can be easily liquidated. However, this defeats the basic purpose of the SIP as wealth creation gets negatively impacted. Is there a way out? One way is to allocate 70% of your SIP to an ELSS. This will ensure that at least for 3 years this amount will be under lock-in and therefore you will be forced to resist the temptation of relying on the SIP for liquidity purposes. Whatever the emergency, always make it a point that your SIP is your last resort for financing the need.

A SIP is not just about rupee cost averaging. There are some basic pre-requisites that you need to understand to make a success of your SIP. Taking care of these basic points will go a long way in helping you genuinely create wealth through SIPs in the long run.

Category: Mutual Funds