A mutual fund is a financial vehicle that pools together the capital from multiple investors to collectively invest in a diversified portfolio of stocks, bonds, or other securities. Managed by professional fund managers, mutual funds offer an efficient and accessible means for individuals to participate in a range of investment opportunities.
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Mutual Fund, is a powerful investment vehicle where multiple investors come together to pool their funds, investing in a diverse range of market-linked assets such as stocks, bonds, money market instruments, and Exchange Traded Funds (ETFs). Eligible mutual fund companies create Asset Management Companies (AMCs) or Fund Houses to facilitate this process.
Skilled fund managers at the AMCs take the reins of your investments, ensuring they are strategically placed to yield maximum returns.
For Non-Resident Indians (NRIs) looking to invest in their home country, mutual funds represent an attractive option. When you invest in a mutual fund, you essentially purchase shares of the fund. It allows NRIs to reap the benefits of the Indian market's potential without the need to manage the investments actively.
Understanding How Mutual Funds Work for NRIs:
Step 1: Choose the Right Fund:
NRIs should consider their investment objectives, risk tolerance, and the mutual fund's past performance and management track record when selecting a scheme.
Step 2: Invest in Fund Units:
Purchase shares or units of the mutual fund, each representing a portion of the fund's overall holdings.
Step 3: Professional Management:
Experienced fund managers handle your investments, diversifying assets and making informed decisions to benefit the fund.
Step 4: Buying and Selling of Mutual Funds at Net Asset Value (NAV):
The fund's NAV, calculated at the end of each trading day, represents the per-unit value of the fund and determines the buy/sell price of fund units.
Step 5: Fees and Expenses:
The Asset Management Company (AMC) charges fees covering operating costs and fund manager salaries, typically expressed as an expense ratio.
Step 6: Earnings Distribution:
Earnings from the mutual fund are either distributed as dividends to investors or reinvested to increase the fund's value.
Step 7: Regulation:
In India, mutual funds are regulated by the Stock Exchange Board of India (SEBI) and the Reserve Bank of India (RBI) to safeguard investor interests and maintain transparency. NRIs should also consider the tax implications in their resident country when investing in Indian mutual funds.
The following table shows the types of mutual funds available in 2023:
|Types of Mutual Funds
|Invest in accordance with Islamic principles, avoiding sectors like alcohol, gambling, and interest-based financial services.
|These funds Invest in a range of stocks, including large-cap, mid-cap, or small-cap, as well as sector-specific options like technology or healthcare.
|Focus on bonds and other debt securities, offering lower risk and regular interest-based income.
|Money Market Funds
|Money market funds invest in short-term, highly liquid securities like Treasury bills and commercial paper. They are low-risk investments and are often used for preserving capital and providing liquidity.
|Balanced or Hybrid Funds
|These funds Blend stocks and bonds to offer a mix of growth and income, ideal for those seeking stability with potential returns.
|Index funds aim to replicate the performance of a specific market index, such as the Nifty 50, to provide broad market exposure with lower expense ratios.
|These funds concentrate on a specific industry or sector, like technology, healthcare, or real estate. They are more focused and can be riskier due to their lack of diversification.
|International or Global Funds
|Invest in foreign stocks and bonds, offering global market diversification but with associated currency risk.
|Speciality or Thematic Funds
|Focus on unique themes or strategies, including sustainable investing, emerging markets, or dividends.
|Tailored for retirement planning, these funds adjust asset allocation to become more conservative as the retirement date nears.
|Alternative funds employ non-traditional investment strategies, including hedge fund-like strategies such as long-short, managed futures, and market-neutral approaches.
|These funds are structured to minimize taxes on capital gains and income, making them suitable for taxable investment accounts.
|Socially Responsible or ESG Funds
|Invest in companies adhering to specific environmental, social, and governance criteria, aligning with investors' ethical and sustainability values.
When considering investing in mutual funds, Non-Resident Indians (NRIs) have two primary options:
Systematic Investment Plan (SIP): SIPs provide a disciplined and flexible approach to investing, allowing NRIs to contribute a fixed amount of money into a mutual fund scheme at regular intervals, such as monthly or quarterly. This method is especially beneficial for those who wish to spread out their investments over time to mitigate risks associated with market fluctuations.
Lump Sum Investment: This option allows NRIs to invest a substantial sum of money into a single mutual fund scheme all at once, thereby taking advantage of market timings and potentially maximizing their returns.
Calculating returns on mutual fund schemes is crucial for Non-Resident Indians (NRIs) to gauge the performance of their investments and make informed decisions that align with their financial goals. Two invaluable tools that can assist NRIs in this process are:
Mutual Fund Calculator
SIP (Systematic Investment Plan) Calculator
These calculators enable NRIs to comprehend the growth of their investments over time and forecast future returns in accordance with their investment strategies, thereby facilitating a holistic approach to wealth management. Mutual Fund and SIP calculators are user-friendly and require minimal input.
When NRIs consider investing in mutual fund schemes, it is essential to be aware of the key charges involved:
These are fees levied by the mutual fund house or distributor for each transaction, including purchases, sales, or switching of mutual fund units. Typically, these charges are a percentage of the investment amount, subject to a minimum fee. NRIs should consider these charges when calculating the cost of their investments.
This annual fee, expressed as a percentage of the fund's Assets Under Management (AUM), is charged by the mutual fund house for managing the fund. The expense ratio encompasses all costs associated with managing and operating a mutual fund scheme, such as investment management fees, marketing and distribution expenses, brokerage fees, and other administrative costs like custodial, transfer agency, legal, and accountants' fees. It is vital for NRIs to evaluate the expense ratio as it impacts the overall returns from the investment.
Some mutual funds impose an exit load when units are sold or redeemed within a specified timeframe after purchase. This charge discourages short-term trading and encourages long-term investment. The percentage charged as exit load and the required holding period to avoid this fee may vary across different funds. NRIs should be mindful of the exit load terms to avoid any penalties when redeeming their investments.
Investing in mutual funds provides a host of advantages for NRIs looking to diversify and grow their wealth. Below are some of the benefits:
Diversification: Mutual funds pool capital from various investors to create a diversified portfolio consisting of stocks, bonds, or other securities. This diversification helps mitigate risk, ensuring that your investment is not dependent on the performance of a single asset.
Professional Management: Mutual funds are managed by experienced fund managers and investment experts who make informed investment decisions on behalf of investors. They conduct in-depth research and analysis to select the best possible investments, saving individual investors time and effort.
Liquidity: Mutual fund shares can be bought or sold on any business day at the fund's Net Asset Value (NAV), offering NRIs liquidity and the ability to access their funds relatively quickly compared to some other investment vehicles.
Affordability: Mutual funds typically have low minimum investment requirements, making them accessible to a wide range of investors, including those with limited capital.
Automatic Investment Options: Many mutual funds provide automatic investment plans such as Systematic Investment Plans (SIPs) or Systematic Withdrawal Plans (SWPs), which are convenient for NRIs looking to invest or withdraw funds regularly for long-term financial planning.
Transparency: Mutual funds provide regular updates on holdings, performance, and NAV, allowing NRIs to easily track their investments and assess fund performance.
Professional Research and Analysis: Fund managers have access to a range of research and analysis tools, offering valuable insights to make informed investment decisions and adjust the fund's portfolio in response to market fluctuations.
Variety of Investment Options: Mutual funds offer various investment options, including equity funds, debt funds, hybrid funds, and sector-specific funds, catering to the risk tolerance and financial objectives of NRIs.
Tax Benefits: In some countries, mutual funds offer tax advantages such as tax-saving funds (e.g., ELSS in India) that provide tax deductions under the applicable tax code.
Professional Asset Allocation: In the case of hybrid or balanced funds, the fund manager expertly allocates assets between equities and fixed-income securities, ensuring a balanced investment approach aligned with the fund's objectives.
To choose the best mutual fund scheme for you in 2023, you should consider the following factors:
Your Risk Appetite: As an NRI, it's important to assess how much risk you're comfortable taking on with your investment. Mutual funds in India offer a spectrum of risk profiles, ranging from low-risk debt funds to high-risk equity funds. Opt for a scheme that resonates with your risk tolerance.
Your Investment Goals: Determine the objective of your investment. Are you channeling funds towards your retirement, your child's education, or perhaps a property purchase in India? Select a scheme that is in sync with your investment goals.
Your Investment Horizon: Consider the duration for which you intend to remain invested. Mutual funds are traditionally seen as a viable option for long-term investment. Hence, it's recommended to choose a scheme that has demonstrated consistent performance over an extended period.
The Fund Manager's Track Record: Evaluate the fund manager's experience and track record in managing the scheme. Investigate their investment approach, past returns, and tenure in managing the scheme.
The Track Record of the Fund House: The reputation and historical performance of the fund house are crucial factors to consider. Examine the fund house's processes they employ, and their overall track record in the market.
Mutual funds offer NRIs a convenient and popular way to diversify their investment portfolio, with professional management and a variety of options tailored to different financial objectives and risk appetites. Leveraging mutual funds can be a strategic approach for NRIs seeking to fortify their financial security and attain long-term wealth.
*All savings are provided by the insurer as per the IRDAI approved insurance
*Tax benefit is subject to changes in tax laws. Standard T&C Apply
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^^The information relating to mutual funds presented in this article is for educational purpose only and is not meant for sale. Investment is subject to market risks and the risk is borne by the investor. Please consult your financial advisor before planning your investments.