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Mutual funds: Do they make sense for non-resident Indians?

Perhaps the best part of the mutual fund industry in India is that it is very tightly and sensibly regulated, and heavily skewed in favour of investor protection. A mutual fund company (asset management company or AMC in India) requires over five years of business track record, 10 crore plus capitalization, and a host of other requirements to get approval from the Securities and Exchange Board of India (SEBI). As a result, when you invest your money with one of the nearly forty AMCs in India, you know your funds will be safe.

A second fact, that many NRIs may not be aware of, is that in the last year, mutual funds in India have become substantially cheaper for the end investor. In the past, mutual funds levied an upfront charge up to 2.5 per cent in addition to a management fee of around two per cent (on equity funds), a part of which was paid as commission to your mutual fund agents. Last year, SEBI banned entry loads, or upfront charges, drastically bringing down the cost of mutual fund investments. As a result, now when you have a financial advisor working with you on mutual funds, you don’t bear an upfront cost to invest.

Investing in a mutual fund is also fairly straightforward as far as NRIs are concerned. An India bank account, either NRE or NRO, is required, which is linked to your investments. One time basic paperwork to establish your identification (referred to as KYC in India) helps you become “KYC-compliant” or enabling you to invest with a mutual fund, following which you can buy and sell mutual funds online. Moreover, now, there are a number of online portals that NRIs can use to directly transact in mutual funds, reducing the paperwork required in the process.

Of the classes of funds available three will be popular with an NRI investor — equity diversified funds, debt funds and balanced/MIP funds.

Equity diversified funds are a category of equity funds that provide broad exposure to the equity markets. They typically hold a portfolio of 30-50 stocks from the major indices in India (BSE100 or BSE200), with the goal of outperforming the index. By choosing a good equity fund, an NRI gets broad exposure to India in blue chip stocks, without the risks associated with mid-cap names. In the last 15 years, the top diversified equity funds in India like an HDFC Top 200 have returned more than six per cent in excess of the benchmark — net of their fees and costs — which is a great performance by global standards.

A second category of funds that NRIs frequently don’t tap are debt funds. Debt funds come in all variants — liquid funds which invest in very short-term paper and offer daily liquidity to medium term funds that invest in three to six month duration paper to longer term funds. Different funds have different credit profiles, and there are some pure government paper funds (gilt funds) also available. A liquid fund typically has no penalty on exit making it ideally for money that would go into a savings account while a short-term fund might have a penalty for exiting under three months. In either case, these funds offer comparable yields to term deposits in India, with a more tax efficient payout structure, and are a good source to park funds where safety of capital is key.

Finally balanced and MIP funds offer a blend between debt and equity to suit your risk appetite. Balanced funds are a hybrid where the fund invests part in equity, part in debt with ratios ranging from 60-40 to 40-60. Monthly income plans are more conservative with 20 per cent of the funds invested in equity and the rest in debt to provide regular income.

With 40 funds and thousands of schemes, there are a plethora of options, and with a little research on fund performance and track record, there should be a scheme to suit most risk appetites.

(Radhika Gupta is a Director with Forefront Capital Management, a SEBI registered portfolio manager and wealth advisor in Mumbai. She is a Wharton graduate and was formerly with McKinsey & Company and AQR Capital Management in New York. Contact her at radhika.gupta@forefrontcap.com)