Everything NRIs Need to Know about Mutual Fund SIP

SIP is an acronym for Systematic Investment Plan. Metaphorically, SIP is just like a sip we take from a glass of water.

Small intakes over a period help us in completing the drink comfortably. Investments through SIPs are somewhat similar.

To start with the basics, what exactly is a mutual fund SIP?

– SIP is an investment option in a Mutual fund that gives you the freedom to systematically invest a particular amount periodically in a mutual fund scheme.

SIP investment is considered to be the most efficient and comfortable way to achieve your financial goals.

NRI – SIP Investment in India

Both Resident Indian as well as Non- Resident Indian (NRI) investors adopt the SIP route for planning and executing their investments, especially while investing in Mutual Funds.

Compared to investments from Resident citizens of India,

NRI investments in India are increasing through SIP as a route for making periodic investments in Mutual Funds, primarily because of their good exposure abroad on this subject.

This article will help you get an insight into,

• Why Mutual Fund SIPs for NRIs?
• Different Types of Mutual Fund SIPs-Review
• Mutual Fund Calculator
• Can NRIs invest in Mutual Fund SIPs in India?
• What are the options available for NRIs to Invest in Indian Mutual Funds through SIPs?
• How can NRIs Invest in Mutual Funds through SIP in India?
• What is the Procedure for an NRI to invest through SIP in India?
• Redemption Proceeds Modality – Mutual Fund SIP
• Exit Load – Mutual Fund SIP
• Mutual Fund SIP-Taxation
• What is STP- Systematic Transfer Plan in Mutual Funds?
  
• What is SWP in Mutual Funds?
  
• Best SIP and STP Plans for NRIs & PIOs (Person of Indian Origin)
• Difference between SIP and STP
  
• Mutual Funds are the ideal investment vehicle for you for all seasons

Why Mutual Fund SIPs is Best for NRIs?

Before 20 years, NRI Investors showed more preference for Real Estate to get higher returns. Then, it became a high-risk market.

Real Estate Market was not regulated well to protect consumers then, compared to Equity or Mutual Fund Market. The case is still the same even now.

So, for the past 20 years, the safe and best investment options in India for NRIs have been Equities and Mutual Funds.

Can NRIs invest directly in equities?

Under the RBI’s Portfolio Investment Scheme (PINS), NRIs may make direct investments in the Indian stock market.

Saving power for NRIs has increased now than earlier.

Instead of EMI which eats money, NRIs are taking the financial advisors’ help to save more using simple SIPs as per their unique needs.

Scope of SIP Investment

People, nowadays, are exploring more Mutual Funds through the Systematic Investment Plan (SIP) mode to save their loose money, which they otherwise spend on less important things in a short time.

The virtue of making investments through Mutual Funds is that the risk is evenly spread out. Small units of investments always help in balancing the risk by cushioning out uncharacteristic spikes and pits.

How does SIP create wealth for investors during the bear market and bull market?

During bull markets, the NAV (Net Asset Value) of a mutual fund Scheme goes up. During bear markets, the units you acquire through SIP go up.

Therefore, in the long term, SIP creates wealth for investors by taking advantage of both the bear market and the bull market.

SIP is a very helpful tool in the process of building wealth, steadily, albeit a little slowly.

But then, it is always the slow and steady who wins the race.

Mutual Fund SIP Example

If you start investing Rs. 5,000 per month from the age of 30, you can accumulate around Rs. 1.5 Crore on your retirement at age 60, if the CAGR is 12%.

Please note that your investment in these 30 years will be only Rs. 18 Lakhs. Rs. 1.32 Crore is the extra accumulation in 30 years. This is the power of compounding!

You have the flexibility to increase/decrease/stop the SIPs at your convenience. If a Fund is not performing, you can stop your SIP in that and start a SIP in a better Fund. You can withdraw from the accumulation in case of any emergency.

What is Lock-In Period for Mutual Fund SIP?

The lock period is 3 years when you invest in ELSS or tax saving schemes of mutual funds through SIP.

In normal equity funds, there is no lock-in period. Also, the lock period for each SIP is 3 Years in tax-saving mutual funds.

Different Types of Mutual Fund SIPs-Review

SIP is considered to be the most comfortable way to achieve your financial goals, but there are various types of SIP investments that can give more convenience.

Different Types of SIPs are available for investors with different requirements.

• a) Mutual Fund – Regular SIP
• b) Mutual fund – Top-up SIP
• c) Mutual fund – Flexible SIP

	Regular SIP	Top-up SIP	Flexible SIP
Amount of Investment	Fixed	The default amount is fixed. Can be increased on a regular basis.	Flexible. Can increase or decrease investment. Also, options to abstain.
Interval of Investment	Monthly	Monthly	Monthly
Preferred choice for	Investors with regular income	Investors with regular income and regular hike	Investors with non-uniform/inconsistent income

A.)Mutual Fund Regular SIP:

This is the most common type of SIP where the mandate is given for investment for a fixed period and a fixed amount is specified.

Examples: You can start a regular SIP investment where you will be investing Rs. 5000 every month for say 3 years. (The amount of SIP, the interval of SIP investment, and the total duration of SIP are variable)

People with regular fixed incomes can opt for this type of SIP to save a regular amount every month.

B) Mutual Fund Top-up SIP:

As the name suggests, this is a form of SIP where the regular amount can be increased in multiples of the default SIP amount for example Rs. 5000 at certain predefined intervals with a maximum limit specified.

Examples: You can start your monthly SIP investment with Rs. 5000 for a period of say 3 years and instruct that the amount be increased by Rs.5000 every 6 months.

You can take advantage of this type of SIP,

• When you expect surplus money and a favorable market in future
• When you expect a salary hike at a regular interval, say every 6 years.
• When you expect no liability expenses (Loans or EMIs) or other expenses after some months, for example, after 6 months.

C) Mutual Fund Flexible SIP:

• In the flexible Mutual fund SIP investment, one may increase or decrease the monthly saving in SIP, based on their cash flow.

• They may also choose to abstain from making any contribution in a particular month or months and again increase the SIP amount in subsequent months.

• When the cash flow increases substantially in a particular month due to any particular event, they can contribute the entire amount to SIP.

• Flexible SIP is useful for NRI investors with irregular income and for people who do not want to commit a particular amount every month.

Examples:

• NRIs in Sales Department may or not get an incentive in a month based on their output.

• NRI Housewives or people with part-time or freelance work may or may not get regular income in a month.

Mutual Fund Calculator

This is a simple and thought-provoking message for the start of the week!

• • Imagine this.

  • You start a SIP of 1 Rupee.

  • That’s you contributing 12 rupees a year.

  • And you do it for 100 years.

  • So, the total contribution from you is 1200 Rupees.

  • It grows at 15%.

  • Take a guess, on the 101st year, when you go to take the accumulation out, how much do you get?
    .
    .
    .

    Do cross-check, it’s 24 Crores!

You can use the calculator, shown below, to find your estimated Mutual Fund Returns.

In this calculator, you can choose various options as per your requirement. Let’s have a look:

Can NRIs invest in Mutual Fund SIPs in India?

Yes, Non-Resident Indians (NRIs), Overseas Citizens of India (OCI), and Persons of Indian Origin (PIOs) are allowed to invest in mutual fund SIP schemes like resident Indians.

No approval is required from RBI or any other body to invest in mutual fund SIPs in India.

What are the options available for NRIs to Invest in Indian Mutual Funds through SIPs?

The Mutual fund SIP Investment options available for NRI are on two basis – repatriable and non-repatriable basis.

For investments to be made on a repatriable basis, an NRI should mandatorily hold an NRE account or FCNR account with a banker in India.

Can I invest in mutual funds from an NRO account?

Yes, an NRO account or NRE/FCNR account is required for investments made on a non-repatriation basis.

• • • For investments to be made on a repatriable basis, one should mandatorily hold an NRE account or FCNR account with a banker in India.

• • • An NRO account or NRE/FCNR account is required for investments made on a non-repatriation basis.

• • •  Non-resident Indians can invest in debt, hybrid, gold, arbitrage, equities, or international funds through the SIP.

How can NRIs Invest in Mutual Funds through SIP in India?

NRI investors can start to invest through SIP in Mutual Funds by proceeding in the following manner.

1. Choose the right Mutual Fund company and the best Mutual fund SIP scheme from a range of Mutual Fund SIP equity and debt schemes which are on offer at a given time.

2. The periodicity of SIP needs to be decided by the NRI, which is usually monthly or quarterly.

3. Setting up or designating an NRI Bank account from where the SIP amount can be deducted electronically. A Direct Debit Mandate or Electronic Clearing Service (ECS) mandate specifying the amount can also be given. Besides, the issue of post-dated cheques is also allowed.

Monthly or quarterly statements are mailed by the respective AMCs (Asset Management Companies) to the designated email address.

What is the Procedure for an NRI to invest in Mutual Fund SIP in India?

NRIs proceeding with their investments in Indian mutual funds have to follow the same set of procedures that apply to resident Indians.

The steps may be summarised as follows.

1. A Completed application form has to be submitted at the Mutual Fund Company/AMC along with the relevant money instrument/s.

2. Details of the bank account in India of the NRI investor must be furnished at the time of application. Alternatively, an online application can be made.

3. KYC for mutual fund investments should be updated through any of these options AMC, KRA, or AMFI.

4. Investment cannot be made in foreign currency. Rupee cheques drawn from the investor’s bank account in India or from abroad payable in a bank in India or Rupee drafts purchased abroad payable at the city where the application is made must be provided.

In case you are providing a cheque or a draft, you must attach a Foreign Inward Remittance Certificate (FIRC) or a letter from the bank with it (cheque/draft) to verify the source of funds.

5. Usual facilities like a nomination, and appointing a Power of Attorney are available for NRI investors as well.

Redemption Proceeds Modality – Mutual Fund SIP

The process of redemption of Mutual Fund SIP proceeds for NRI investors is not much different from that of resident individuals.

NOTE: If the individual invests in a Mutual Fund as a resident Indian, and later the residential status changes to an NRI then maturity proceeds will not qualify for repatriation.

Generally, the sale proceeds are directly credited to the holder’s account directly, or they are remitted through cheque in Indian Rupees.

For investments that have been made on a non-repatriable basis the proceeds will be sent directly to the NRO account of the individual.

In case of the death of the Mutual Funds holder, the nominee or legal heirs can redeem the units.

Dividends earned from the Mutual Fund SIP investments are repatriable.

Exit Load – Mutual Fund SIP

Well, most Mutual Fund SIPs clearly specify that withdrawals made before 1 year will attract an exit load. This means that some amount will be deducted if the investor redeems his holding before 1 year.

It is often that NRI investors feel that if they have been investing for say 3 years in Mutual Funds through the SIP route, then while redeeming the entire holding there will be no exit load.

This is an incorrect premise primarily because the active SIP amounts which have been invested within the period of the prior 12 months are considered as investments below 1 year and will hence attract exit load.

Here is an example of exit load computation at the time of redemption, for holdings less than 1 year. The quantum of exit load is assumed as 1 % of NAV.

Example: Mr. X is an NRI who has been investing in Rs. 2000/- every month for the last 2 years approximately (starting on 1^st June 2021).

At the end of one year – as of 1^st June 20122, he has 230 units, and as on 1st May 2023 (at the end of one year and 11 months)he has 500 units.

Mr. X chooses to redeem 300 units on 1^st May 2023.

In such a case 230 of his units will not attract exit load; while the balance of 70 units which are accumulated in the 11 months period will be charged with exit load

since it is to be redeemed before completion of one year.

If the NAV is Rs.50 as on 1^st May 2023, then Mr. X will receive:

• • • • • Units to be redeemed = 300
        • = 230 + 70

NAV of total Units to be redeemed = (230×50) + (70×50)

= (11500) + (3500)

= 15000

Exit Load (1%) applicable only for the 70 units = 3500 × 1%

= 35

After deduction of Exit Load, Mr. X will receive an amount of = 15000 – 35

= 14,965 Rs

Mutual Fund SIP –Taxation

As per prevalent Tax Laws in India, Mutual Fund SIPs are subjected to Capital Gains Tax as they are considered Capital Assets.

Long-Term & Short-Term

Equity Mutual Fund holdings that exceed 12 months are subjected to Long Term Capital Gains tax. Long-Term Capital Gains.

Equity Mutual Fund holdings below a period of 12 months are subjected to Short Term Capital Gains tax.

Dividends are taxed as per the individual’s tax slab rate.

For NRI investors, TDS is mandatorily deducted for any capital gains tax which may be due.

NRIs can take benefit of indexation where their Mutual Fund SIP Investments are attracting Capital Gains Tax.

TDS (Tax Deducted at Source) Rates for NRI Mutual Fund Investors 2023-24

Below are the applicable TDS rates for NRI Mutual Fund investors for FY 2019-20.(You can also find the SIP tax for NRIs below)

	STCG	LTCG
Equity Oriented Mutual Fund SIPs	15 %	10 %
Debt Mutual Funds	As per your income tax slab rate	As per your income tax slab rate

Points to Remember:

• • One of the essential things to remember for an NRI is that investing in Indian Rupee is fraught with the risk of exchange fluctuations.

• • It is also imperative that the investor is aware of the tax implications which might be applicable as per the law of their country of residence, for investing in India.

• • Overlooking the same before making the investment may result in an unpleasant surprise at the time of redemption in the form of an additional tax burden

India is an emerging market, and so we get higher returns compared to the US which is a developed country and brings medium returns.

NRI investors, who want to benefit from the Indian Market, can opt for the best Mutual Fund Investments and choose to stay invested in the same through SIPs.

Handling the dynamics of Equity Investment might not be everyone’s cup of tea, but investing through mutual fund SIPs will generally provide good returns without having to shoulder higher risks.

Mutual Fund SIP, as a channel for investing small amounts over a period, will help NRI Investors in growing wealth in a steady and disciplined.

What is STP- Systematic Transfer Plan in Mutual Funds?

STP stands for Systematic Transfer Plan in mutual funds. It can be useful, when you have a lump sum to invest in a Mutual Fund.

Instead of investing the entire amount into Equity Fund in one go, you can invest that amount in any Debt Fund of the same Fund House and opt for a Systematic Transfer to the Equity Fund.

STP Calculator – Systematic Transfer Plan Calculations with Example

Suppose, you want to invest Rs. 1 Lakh in an Equity Fund, you can invest the Rs. 1 Lakh in a Debt Fund and opt for a STP of Rs. 10,000 into the Equity Fund of your choice.

At a fixed date of every month, Rs. 10,000 from the Debt Fund will be transferred to the selected Equity Fund.

The entire amount will be transferred to the Equity Fund, in 10 months. This will ensure that your money is unaffected by any market volatility in the short term.

Your investment will be getting debt returns, as long as it is in the Debt Fund. At the end of 10 months, there will be some left out amount in the Debt Fund, which is the growth of the Debt Funds in that 10 months.

You can transfer this accumulated amount into the Debt Fund and also into the Equity Fund. Instead of monthly STP, you can opt for weekly STP. You can decide on any term of your choice. It is flexible.

STP is an ideal tool to insulate your savings when you are nearing your financial goals.

If you have accumulated Rs. 10 Lakhs in your Equity Fund, and you require the amount after 2 years for your son’s education,

it is better to start an STP from the Equity Fund to a Debt Fund to protect your savings from any last-minute market swing.

This will ensure a safe landing.

What is SWP in  Mutual Funds?

SWP is a Systematic Withdrawal Plan in Mutual Funds

How does Systematic Withdrawal Plan work?

If you want a pension after retirement, SWP will be the ideal way for it from the Mutual Fund route.

A systematic Withdrawal Plan allows you to withdraw your accumulation at a fixed date of your choice. Furthermore, you can request for withdrawal of a prefixed amount at fixed intervals.

The amount withdrawn is treated as the redemption of units at the applicable NAV. You can opt for cheque payment or direct credit to your bank account.

After retirement, you can set up a SWP from your accumulation, which will act as a regular pension.

SIP and STP Tax Benefits under Section 80C

SIP and STP are the ways to invest in Mutual Funds and not the financial instrument to invest in itself.

You get tax benefits for investing in mutual funds and that too under tax-saving mutual funds. Tax-saving mutual funds are known as ELSS funds. Tax benefits up to Rs. 1.5 lacs are available under Section 80C for both SIP and STP.

Best SIP and STP Plans for NRIs & PIOs (Person of Indian Origin)

Again, there are no best SIP and STP plans. You can definitely search for the best mutual fund plans as you are investing in mutual funds, not in SIP or STP.

You can invest, through SIP, in different mutual funds like ICICI, SBI or HDFC.

Difference between SIP and STP

The main difference between SIP and STP is

In SIP, you are investing on a regular basis to build a corpus while in STP you are already having some amount of corpus which you are transferring from one asset to another at regular intervals.

Mutual Funds are the ideal investment vehicle for you for all seasons

Mutual Funds give you flexible investment options through SIP. You can invest during your active life for your long-term goals through Equity Mutual Funds.

Also, Mutual Funds offer a tax-efficient way of investing for long-term goals.

You can start saving through SIPs when you are earning. The earlier you start, the better. When you are nearing the goals, you can do an STP to Debt Fund to reduce the impact of market volatility.

After retirement, you can ensure regular income using SWP.

If you have any comments or questions, write them in the comment box below.

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