Can NRI Invest in ETF?

An ETF is an index-cum-investment fund that is listed and traded in the stock exchange. It has the combined features of stocks and mutual funds. They can be traded just like a stock and their value depends on the value of their underlying assets.

What are ETFs?

An ETF or an Exchange Traded Fund is similar to stock, also known as a basket of securities. ETFs invest the amount in diverse avenues such as shares, bonds, debt securities, and money market instruments.

Most ETFs are registered with the SEBI or Securities and Exchange Board of India. Exchange-Traded Funds are suitable for amateur investors with limited knowledge of the stock market.

How Do ETFs Work?

ETFs share the characteristics of mutual funds and shares. They are listed on most stock exchanges and can be purchased or sold as per investor needs during equity trading.

The underlying asset costs of the resources pooled influence the fluctuations in the share price of ETFs. The ETF shareholders receive dividends depending upon the asset management and performance of the associated ETF company.

Companies manage ETFs either actively or passively. A portfolio manager operates the actively managed ETFs after careful assessment of stock market conditions. He/she takes a calculated investment risk by choosing companies with maximum returns potential. The manager passively manages ETFs by following trends of market indices and investing in those companies that show steady growth on the charts.

What are the Types of ETFs for NRI Investment?

The common types of ETFs in India for NRI investment are:

• Equity ETF – These funds invest in shares and equity of various companies.

• Gold ETF – This commodity ETF involves investment in gold assets. When you purchase shares of a Gold ETF company, you officially become the owner of gold without the hassle of asset protection.

• Debt ETF – Debt ETF companies trade in debentures, government bonds, and securities that yield fixed returns.

• Currency ETF – Currency ETF funds leverage the exchange rate fluctuations. Companies purchase make calculated predictions about future currency performance before buying them. Currency ETF's follow the respective countries' economic and political scenarios apart from the stock exchange trends.

Can NRIs Invest in ETF?

NRIs can invest in ETFs in India if they adhere to the Foreign Exchange Management Act (FEMA) rules. But some Asset Management Companies do not accept mutual funds applications from NRI's of the USA and Canada.

An NRI will need an NRI trading account, bank account, and a Demat account to invest in ETFs. To invest in ETFs in India on repatriation or non-repatriation basis, NRI's must follow certain rules and regulations.

Steps to Invest in ETFs in India

An NRI investor must first approach any Indian bank authorized by the RBI (Reserve Bank of India) to open an NRE/NRO account and administer the Portfolio Investment Scheme (PIS).

New investors can get confused when choosing between NRO and NRE accounts. Although both accounts serve the same purpose, there have some distinctions:

• With an NRE account, you can repatriate funds along with interest from your account without limit. 

• With an NRO account, you can only invest up to USD 1 million a year according to RBI limits.

You need to observe some other regulations before trading in ETFs in India as an NRI investor.

To proceed with the investment, you must open an NRI trading account and a Demat account. You can make your ETF investment with either the same bank where you have your account or through a reliable stock broking agency. 

The following documents are required for investment:

• A valid passport and visa

• PAN Card

• Address proof in the residential country

• Investor's photo 

• Bank account proof (if investing through an outside firm)

• PIS (Portfolio Investment Scheme) permission letter from the concerned bank (if investing through an outside firm).

Your mutual fund application must be submitted with the essential KYC details that must also include whether your investment is repatriable or not.

The KYC documents you need are attested copies of your passport, PAN card, recent photograph, residence proof, and bank statement. Some banks may need a physical verification for which you have to visit the Indian embassy in your resident country.

Another common method adopted by NRIs is to allow another individual to invest on their behalf. You have to appoint a power of attorney (POA) to make investment decisions on your behalf. Both the investors' and POA's signatures will be needed on the KYC documents to proceed with the mutual fund investment in India.

Advantages of Investing in ETFs

ETFs are a cost-effective way for NRIs to invest in the Indian financial market and gain exposure to a basket of equities with lower transaction and management fees.

Being high liquid instruments, ETFs permit investors to invest or divest in the Indian share market. You don't have to worry about cumbersome paperwork causing a time lag while maintaining an account in India. 

Various other benefits of NRI investment in ETFs are:

• Diversification of funds – By investing in index-based ETFs, NRI investors automatically leverage the benefits of diversification across companies, sectors in place of direct investment in individual companies.

• Liquidity – ETF investments are highly liquid, and NRI investors can easily get in and out of their positions without any need to coordinate across different time zones and geographies.

• Lower Fees – ETFs mirror the existing investment index, and so they automatically rebalance to reflect the current market value. The funds hence require minimum portfolio management and thereby have a low-cost structure.

• Minimum Paperwork – If the NRI invests in US-based ETFs, paperwork will be limited to only your home country and can save you both time and money.

• Tax Management – If you hold a portfolio having both India and US ETFs in one account, you can reduce the tax to be paid through tax loss and tax minimization strategies.
  Disclaimer: Tax benefit is subject to changes in tax laws.

• Easy Management – NRIs can invest in ETFs online, making it much quicker and easier to track and manage their mutual funds from any corner of the globe. You can purchase, redeem, and switch between different mutual fund schemes or opt for systematic transfer or withdrawal online. You don't need to issue a cheque or demand draft, submit physical forms or even be in India to manage your investment. The fund manager will send you consolidated account statements regularly via email. Asset management companies disclose entire portfolio holdings online so that you stay informed and up-to-date.

• Leverage Rupee Appreciation - If the rupee value is appreciated against the foreign currency, you get more profit. For example, if a UK NRI invests 1000 pounds against an Indian mutual fund at an exchange rate of Rs 100 per pound, they can reap good benefits against rupee appreciation. NRIs can also leverage the currency benefit on their investment of Indian-based mutual funds in their resident country.

What are the Limitations of Investing in ETFs?

The only concern for NRIs about their ETF investment in India is the fear of double taxation. You don't need to worry about this if you have signed the Double Taxation Avoidance Treaty or DTAA with your resident country.

Equity mutual fund gains are taxable for the holding period, while short-term capital gains on equity funds attract tax at 15%. Long-term capital gains over Rs 1 lakh a year are taxable at 10%, excluding indexation benefits.

Short-term capital gains from debt-oriented funds are taxable as per the individual's tax bracket. If you hold the funds for more than three years, you will pay a 20% tax on the long-term capital gains, including indexation benefit. Capital gains from un-listed mutual funds will be taxed at 10%, excluding indexation benefits.

Things to Remember for NRIs While Investing in India

You should keep the following things in mind while investing in India:

• You have the right to the repatriation of the invested and earned amount only until you remain an NRI.

• An NRI must submit a residential proof from his home country and attach its attested copy along with the application.

• Due to the strict compliance requirements in the USA and Canada, FATCA guidelines require that all financial institutions share details of the transactions between a US national and the government.

In Conclusion

By investing in ETFs in India, you can get the opportunity to invest in the Indian debt and equity market either for your personal or other needs.  You can leverage several benefits like low cost, enhanced liquidity, reduced paperwork, and tax reduction. ETFs are a bankable investment choice in India for NRIs.

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