Equity Scheme Returns Have Declined. Should You Exit?
Most actively-managed equity schemes have underperformed their respective benchmarks in the past three years. The same actively-managed equity schemes had risen to fame due to stellar outperformance in the past. Does that mean you should exit actively-managed equity schemes now? Let’s take a closer look.
 
We will find out the period when outperformance of equity schemes reversed to...
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  • How NRIs Can Invest in Indian Mutual Funds
    Non-resident Indians (NRIs) are allowed to invest in mutual funds, based in India, subject to compliance with the Foreign Exchange Management Act (FEMA). Here is the rationale, procedural steps, formalities to be complied with, and the tax treatment in case of NRI investment in mutual funds.
     
    Investment Rationale: India’s economic growth story continues to attract investors globally. Several institutional investors, especially FIIs (foreign institutional investors) derive enhanced returns from investing in Indian stocks. NRIs can diversify their portfolio by allocating a certain portion of their investment to mutual fund holdings in India.
     
    Based on their risk appetite, the NRIs can choose from the high risk-return equity schemes, or the relatively low risk-return debt schemes. 
     
    Note: An equity oriented mutual fund refers to a schemes in which more than 65% of the portfolio is allocated towards investment in equities.
     
    Advantages of Opting for Mutual Funds in India:
     
    1. Digital Process: The online investment process has facilitated tracking, managing and investing in mutual fund units as per one’s convenience, irrespective of one’s physical location. Thus, NRIs based in another resident country can buy and redeem units, alter asset allocation, conduct transactions such as withdrawal or systematic investments in mutual funds operating out of their home country, India. This has eliminated the need of physical presence of the investor. AMCs (asset management companies) are mandated to disclose the portfolio investments and send periodic account statements to help investors stay up to date.
     
    2. Foreign Exchange Gains: Besides the capital appreciation on sale of mutual fund units, NRIs have also enjoyed higher earnings from a steady depreciation of the rupee.
     
    Procedural Steps To Be Followed by NRIs To Invest in Mutual Funds:
     
    Step 1: Opening the Required Account with a Bank: Mutual funds are not allowed to accept direct investments in foreign currency. Thus, NRIs need to open a rupee-denominated NRO account (non-repatriable basis) or NRE account (repatriable basis) with an authorised Indian bank to invest. 
     
    Note: While balances held in NRE accounts may be repatriated abroad without any restrictive conditions, funds in NRO accounts are not permitted to be remitted abroad and have to be utilised towards local rupee payments. Accordingly funds payable to the non-resident accountholder which are not allowed to be remitted abroad will be mandatorily credited to the NRO accounts.
     
    Stelp 2: KYC Compliance: As part of the KYC process, NRIs would be required to submit copies of passport with details of name, date of birth, photo, proof of residential address (outside India), bank statement. In certain cases, the authorised representatives of the fund houses might undertake an in-person verification.
     
    Step3: Method of Investment: Since, the NRI is physically present in a country of residence other than India, he/she has the option to invest in mutual funds either by self or direct mode or indirectly by appointing a valid power of attorney. 
     
    Direct Mode: Under this, the NRI is entitled to conduct transactions via regular banking channels. Additionally, the investment should disclose details of repatriation or non-repatriation status of the proceeds. Additionally, banks might conduct an in-person verification, which can be fulfilled by visiting the India embassy in the NRI’s residential country.
     
    Power of Attorney (PoA): Under this, the investment decisions are carried out by the holder of Power of Attorney. If this is to be used, it is compulsory that the KYC documents are attested by both the NRI investor as well as the PoA holder.
     
    Step 4: Disclosure of Sources of Funds: NRIs need to validate the source of funding towards the investment. In case of payment through cheque or draft, it is mandatory to submit a foreign inward remittance certificate (FIRC). Alternatively, a bank letter would also suffice as confirmation. 
     
    Certain funds houses might disallow or impose additional restrictive conditions on investments from NRIs based in the US and Canada owing to the stringent regulations under the Foreign Account Tax Compliance Act (FATCA). For example, fund houses ICICI Prudential AMC, Birla Sun Life Mutual Fund and SBI Mutual Fund permit investments only via an offline transaction with a declaration attested by the NRI investor.
     
    Step5: Redemption: Broadly, AMCs transfer the proceeds upon redemption after deducting the necessary withholding tax on the capital gains. Certain banks permit transfer of the amount to the NRO/NRE account. The proceeds may be also be realised by cheque. 
     
    Tax Treatment: The NRI is entitled to enjoy tax relief in the country of residence, in case a comprehensive Double Taxation Avoidance Treaty (DTAA) has been signed with India and the same is in force. According to the holding period and the asset allocation of the mutual fund, it may be classified as a long-term or short-term asset. The following are the holding period and classification:
     
    • Long-term asset where period of holding is more than 36 months: Debt mutual funds;
    • Long-term asset where period of holding is more than 12 months: Equity mutual funds, balanced mutual funds;
    • Short-term asset where period of holding is less than 36 months: Debt mutual funds;
    • Short-term asset where period of holding is less than 12 months: Equity mutual funds, balanced mutual funds.
     
    The following are the prevailing tax rates on mutual funds, depending on the holding period:
     
    • Tax on equity mutual funds and hybrid funds:

     

    • Short-term capital gains are liable to tax @ 15%;
    • Long-term capital gains, exceeding Rs 1 lakh are liable to 10% tax.
     
    • Tax on debt mutual funds:
     
    • Short-term capital gains are liable to tax @ 30%
     
    • Long-term capital gains with indexation benefit is liable to 20% tax;
    • Long-term capital gains without indexation benefit is liable to 10% tax.
     
    To sum up, NRIs can invest in mutual funds based in their home country India and reap the benefits of higher returns. Investing in MF is a prudent portfolio diversification tool. However, it would do well to remember the caveat "Mutual Fund investments are subject to market risks, read all scheme related documents carefully before investing."
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    COMMENTS

    Prakash Bhate

    3 weeks ago

    Investment by US based NRIs in Indian mutual funds is a non-starter because of the way these investments are looked at by the US-IRS. No tax preparer is willing to work for a client who has mutual fund investments; if at all willing, the fees charged are so exorbitant that any gains in these investments are more than gobbled up in these fees.

    Best & Worst Mutual Fund Schemes

    The best three and the worst three mutual fund (MF) schemes over the past three years ranked by their quarterly rolling returns. Premium members get access to a more refined list of top schemes by logging into Moneylife Advisory
     

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