Why Mutual Fund Investing for NRIs is different than for Resident Indians

Non-Resident Indians (NRIs) investing in mutual funds face unique considerations compared to resident investors, such as currency depreciation and opportunity cost. Over the long term, the Indian Rupee has consistently weakened against the US Dollar and other major currencies. This means NRIs investing in Indian mutual funds must factor in potential currency losses when repatriating their money.

Currency Depreciation: Think of it - You invest USD 100,000 in India when USD-INR is 85 i.e, INR: 8.5 Million. This grows to INR 1.7 Million over 6 years resulting in a ~12% CAGR in rupee terms.However when you want to repatriate the funds back from India, the USD-INR rate has depreciated to 100! And you repatriate back USD 170,000 resulting in dollar CAGR of ~9% only. Additionally, NRIs must be mindful of taxation on capital gains, which varies depending on their country of residence, with jurisdictions like the US and Canada imposing additional reporting requirements for foreign investments.

Opportunity Cost: Another critical consideration is the opportunity cost of investing in other emerging markets. NRIs have access to global investment opportunities, including equities in the US, Europe, and other emerging economies like China and Brazil. They have easy access to low cost ETFs allowing them to invest in emerging opportunities such as semiconductors, blochchain, nuclear and green energy, etc.

Why Invest in India:

• Growth Translates to Stock Market Returns:

India remains one of the fastest-growing economies with strong corporate earnings, favorable demographics, and a stable regulatory framework. Historically, India's GDP growth has also translated to stock market returns unline other countries such as China, Indonesia, Brazil, etc. This makes India a better bet among emerging markets, with higher long-term growth potential. For NRIs who plan to eventually return, investing in Indian equity mutual funds ensures participation in the country’s economic growth while also building a corpus in the currency they will ultimately spend in.  

• Financial Planning for Family and Self:

Many NRIs support their aging parents in India, and one of the best ways to do so is through debt mutual funds. By maintaining a portion of their portfolio in high-quality short-duration debt funds, NRIs can ensure liquidity and stability, allowing them to cover their parents' expenses for the next 2-3 years without worrying about market volatility. Additionally, NRIs planning to return to India in the near future should consider structuring their investments to create a cash flow buffer, ensuring they have sufficient liquid assets to support their career transition, kid's education and the general cost of setting up a house which ensures continuity of their existing lifestyle. While equity mutual funds help build long-term wealth, a mix of debt and hybrid funds can provide stability and income during the relocation process.

• Gold and Real Estate:

Gold mutual funds also make strategic sense for NRIs as they act as a hedge against rupee depreciation. Since the price of gold in India is determined by global gold prices multiplied by the USD/INR exchange rate, gold tends to appreciate in INR terms when the rupee weakens. This makes it a valuable asset class for NRIs looking to protect their purchasing power over time while benefiting from India's strong cultural demand for gold.

NRIs love investing in real estate and the Indian tax laws allow setting off capital gains in equity mutual funds against real estate purchases. If as an NRI you have been investing in Indian markets for 5-10 or more years and are sitting on amazing returns from equities, you can very well plan a real estate purchase for diversification, rental income support to parents OR your own living when you return to India and not pay capital gains tax.

• Alpha Potential

Indian active mutual funds still generate Alpha versus the index. For example, in 2024 the Top-10 Flexicap mutual funds generated a 4%-5% alpha after fees over the index. This makes Indian mutual funds an attractive portfolio addition in an increasingly passive global portfolio.

Why WealthMan:

We work with NRIs across the globe with different financial requirements - right from students going abroad for masters to professionals planning their India return. We work with NRI investors on cashflow planning, regulatory compliance (KYC, FATCA, etc.), portfolio construction and performance monitoring.

Reach out to us on hello@wealthman.in or whatsapp us on +91-7389941051 to know more on how we can help you plan your Indian mutual fund investments.