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How to Invest In Indian Mutual Funds from UAE

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Are you an NRI from the UAE wondering how to invest in mutual funds from UAE in India?

You're not alone!

A study titled 'The NRIs' Investment Inflows into India – A Pulse Study' revealed that after the upcoming general elections, several UAE-based NRIs are planning to boost their investments in India. For many, the goal is a comfortable retirement back in their home country.

From the various avenues to invest, mutual funds are among the top choices. The study also showed NRIs exploring diverse asset classes like long-term investment plans, retirement schemes, and government-supported infrastructure funds.

Before going ahead, it's essential to understand the specific guidelines and rules for UAE-based NRIs. This article will guide you through the process — read on to make informed investment decisions.

Can NRIs Invest in Mutual Funds in India?

Yes, NRIs can invest in Indian mutual funds from the UAE. However, they must adhere to the rules set by the Foreign Exchange Management Act (FEMA). Here are the rules:

  • According to regulation 2 of FEMA Notification No. 12 dated May 3, 2000, an NRI is an individual who lives outside India but is a citizen of India.
  • The Income-Tax Act 1961 states that a resident is someone who has stayed in India for 120 days or more during the past four financial years and at least 60 days in the current year. Thus, NRIs are those who have visited India for less than 120 days in a financial year.
  • A recent change in the rules highlights that the 120-day limit used to be 182 days. But now, if an NRI's income in India exceeds INR 15 lakhs in a financial year, the 120-day rule will apply. However, if their income in India is up to INR 15 lakh, they will be considered NRIs if their stay is less than 181 days, just like before.
  • The way in which an NRI is defined in FEMA determines where they can invest. On the other hand, the definition of NRI in the Income Tax Act explains how their investments will be taxed.

<a class='inter-link' id='investment plan link' href='https://www.policybazaarinsurance.ae/investment-plans/'>investment plan</a>

How to Invest in Indian Mutual Funds from UAE?

Follow the given steps to start investing in Indian mutual funds from the UAE –

Step 1: Set Up an Account

Before investing, an NRI is required to set up an account because Indian mutual funds can't accept investments in foreign currency.

  • NRE Account: This is the Non-Resident External (NRE) account. It can be a savings, current, fixed, or recurring deposit account where you deposit foreign currency. To deposit Indian currency, an NRO account is needed. No maximum transaction limit is applicable to an NRE account.
  • NRO Account: This Non-Resident Ordinary (NRO) account is for NRIs to manage their earnings in India. When you deposit foreign currency, it gets converted into Indian rupees. You can hold this account jointly with another NRI or a resident Indian. After opening one of these accounts, you must complete the KYC process as outlined by SEBI.

Investing Methods

  • Self/Direct: NRIs can carry out transactions themselves. In this case, they will need to provide KYC details, show if the investment is repatriable or not, and submit necessary documents like a PAN card, passport, proof of residence outside India, and a bank statement. Sometimes, in-person verification might be required at the Indian Embassy in UAE.
  • Through Power of Attorney (PoA): NRIs can let someone else invest on their behalf, with mutual fund companies in India permitting this. Both the NRI and the PoA must sign the KYC documents.

Step 2: Complete Your KYC

UAE-based NRIs need to -

  • Submit the KYC Form with details to a SEBI-registered intermediary.
  • Provide documents like overseas and Indian address proofs, a recent photo, and a passport copy. Merchant Navy NRIs should also give a mariner's declaration or a Continuous Discharge Certificate.
  • Get the documents attested by any of the authorised officials like judges, public notaries, or the Indian embassy in their country.
  • Undergo an In-Person Verification (IPV) as mandated by SEBI. All submitted documents should be in English.

Step 3: How to Redeem?

The redemption of mutual fund investments varies across fund houses in India. After following the specific redemption process of the fund house, the AMC will deduct taxes and credit the remaining amount to the NRI's NRE or NRO account. Alternatively, they might issue a cheque for the amount.

NRIs Mutual Fund Taxation Procedure

Taxation for mutual funds in India is consistent — whether you're an Indian resident or an NRI. If you were investing in mutual funds and paying taxes on the gains when you lived in India, the same rules apply after you move to the UAE and continue investing. 

Here's a simple breakdown for those unfamiliar with the tax structure -

Type of Fund Investment Duration Tax Rate
Equity Mutual Funds Up to 1 year (Short Term) 15%
Over 1 year (Long Term) 10% (Only if gains exceed Rs 1 lakh annually)
Balanced Mutual Funds Short Term 15%
Long Term 10% (without indexation)
Non-Equity (Debt) Schemes Short Term As per individual tax slab
Long Term 20% (with indexation)

Note: Surcharges will be added to the mentioned tax rates.

How Mutual Funds Work in India?

Here's a simple breakdown of how mutual funds work, especially if you're an Indian citizen residing in the UAE -

  • Pooling of Resources: Mutual funds are a big pool where many people, including you, will contribute money. Everyone puts in a sum of money to buy units or shares of the fund.
  • Professional Management: This pooled money is then managed by professionals called fund managers. They will decide where to invest the money to get the best returns. This way, you don't have to constantly watch the market or decide which stocks to buy or sell.
  • Diverse Investment: Mutual funds invest in a variety of assets. This diversification reduces the risk because not all your money is tied to a single stock or bond. If one fails, others might perform well, balancing the loss.
  • Returns and Dividends: The profit made from these investments is either reinvested or distributed to the investors as dividends. If the value of the investments grows, the value of your mutual fund units will also grow.
  • Liquidity: You can easily buy or sell your mutual fund units, giving you quick access to cash when required.

Best Mutual Funds in India for NRIs

Tabled below are the best Indian mutual funds along with their key aspects -

Mutual Fund Category Net Assets (Cr.) as of 31 August, 2023 Expense Ratio Exit Load Compound Annual Growth Rate (5 Years)
ICICI Prudential Infrastructure Fund Equity – Sectoral INR 2,986 2.22 0-1 Year (1%), 1 Year and above (NIL) 22.4%
HDFC Infrastructure Fund Equity – Sectoral INR 856 2.56 0-1 Year (1%), 1 Year and above(NIL) 16.9%
Nippon India Small Cap Fund Equity – Small Cap INR 36,540 1.82 0-1 Year (1%), 1 Year and above (NIL) 26.2%
L&T Emerging Businesses Fund Equity – Small Cap INR 11,549 1.84 0-1 Year (1%), 1 Year and above (NIL) 21.2%
DSP BlackRock India T.I.G.E.R Fund Equity – Sectoral INR 2,471 2.24 0-1 Year (1%), 1 Year and above (NIL) 21.3%
IDFC Infrastructure Fund Equity – Sectoral INR 768 2.44 0-1 Year (1%), 1 Year and above (NIL) 18.3%
BOI AXA Credit Risk Fund Debt – Credit Risk INR 153 1.55 0-12 Months (4%), 12-24 Months (3%), 24-36 Months (2%), 36 Months and above (NIL) -3.1%
HDFC Small Cap Fund Equity – Small Cap INR 22,560 1.82 0-1 Year (1%), 1 Year and above (NIL) 21.1%
Franklin Build India Fund Equity – Sectoral INR 1,507 2.29 0-1 Year (1%), 1 Year and above (NIL) 20.7%
Nippon India Power and Infra Fund Equity – Sectoral INR 2,545 2.23 0-1 Year (1%), 1 Year and above (NIL) 21.4%

Investment Plan

Factors to Consider for Investing in Mutual Funds from UAE

Before investing, you should consider some factors to ensure that your investments align with your goals and risk tolerance.

Here are the key factors to keep in mind -

  • Your Investment Goal: Always start with the end in mind. 

For instance, are you investing for retirement, to buy a house, or for your child's education? 

Depending on your goal, you can choose a mutual fund that aligns with your time horizon and risk appetite.

  • Risk Tolerance: Each mutual fund comes with its own set of risks. While equity funds might offer high returns, they also carry higher risks. Debt funds might be safer but offer lower returns. 

Assess how comfortable you are with market fluctuations and choose funds that match your risk profile.

  • Fund Performance: It's essential to look at how a mutual fund has performed over the years. While past performance isn't a guarantee of future results, it can give you an idea of the fund manager's expertise and the fund's consistency.
  • Costs and Fees: Mutual funds charge fees, commonly indicated in the form of expense ratios. These fees can mitigate your returns. Always compare the expense ratios of different funds and opt for ones that offer good returns at lower costs.
  • Liquidity Needs: If you believe you might be required to access your money soon, consider investing in funds that are more liquid and allow easy withdrawal without hefty penalties.
  • Currency Fluctuation: Since you're investing from the UAE, consider the exchange rate between the Dirham and the Indian Rupee. Currency fluctuations can impact your returns, especially when you convert your earnings back to Dirhams.

The Takeaway

If you are investing in Indian mutual funds, you should need a blend of knowledge, strategic planning, and careful consideration of multiple factors. This comprehensive guide has elaborated on how to invest in Indian mutual funds from UAE, taking into account the essential procedures, taxation implications, and critical factors to ensure a good investment experience.

By understanding and adhering to the guidelines set by relevant Indian authorities and being vigilant about tax implications, NRIs can benefit from the diverse investment opportunities offered by the Indian mutual fund sector and make informed choices.

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