If you have chosen to invest in India as an NRI, the two most favorite avenues are real estate and stocks. For many who do not have a family (parents and siblings) living here, real estate can be dicey, as real estate developers are not always candid or honest.
Even after you get delivery, there is a need for supervision, municipal tax payment after the hearing, and several more headaches. That is why more and more NRIs are turning to stock markets and, more precisely, to mutual funds.
The reason is obvious: It needs little supervision apart from reading monthly newsletters and benchmarking it with other similar funds.
What is SIP?
A Systematic Investment Plan, or SIP, is a popular way to invest. Of course, you can buy units of an MF for a lump sum. But a SIP allows you to save regularly.
As India stands poised to become a $5 trillion economy by 2025, the stock market is booming. Even during the pandemic, it has barely dropped and is almost near its all-time high (as of September 2020).
The upside is tremendous, and taking part in this bull run through a SIP is the safest, most affordable, and most profitable way to make your wealth grow.
Types of SIP
SIP can be regular or flexible.
If you are a salaried individual, then a fixed SIP is best. You invest a predetermined sum of money, like $1,000, every month. The duration may be fixed—e.g., 3 years or open-ended.
Usually, mutual fund houses lock in the SIP period for at least 6 months.
A flexible SIP allows you to vary the monthly contribution to any amount more than a minimum threshold amount. Needless to say, due to the difficulty of calculation, it is not preferred by mutual fund managers but nevertheless available.
To use a SIP, you need to give your bank a mandate (similar to buying on EMI) that allows the mutual fund to debit your account every month.
How Do I Open a SIP?
An NRI can easily own and operate a SIP. There is no restriction from the Reserve Bank of India. Of course, as always, you have to be careful to follow the Foreign Exchange Management Act, 1999, in letter and in spirit.
In order to invest, you would need to provide the following documents:
- Copy of PAN
- Copy of valid passport
- Proof of address overseas
- Proof of address in India
- Photograph
- KYC
There is also a need to provide all information to update the FATCA database by the mutual fund house. Usually, the FATCA form is a part of the application form for NRIs.
You can use both NRE and NRO accounts for your SIP payments.
Since some SIP types allow withdrawals, you should use NRE if you want to repatriate funds abroad.
Tax implications
If you invest in equity-oriented funds, then any profits on holding for more than 12 months qualify as Long-Term Capital Gains (LTCG). Shorter periods are taxed under Short-Term Capital Gains (STCG).
For debt-oriented funds, the LTCG kicks in after 3 years.
For hybrid funds, the rule varies. If the investment in equity is more than 65%, then it is 12 months; otherwise, 36 months to LTCG. Shorter duration is taxed as STCG.
Of course, SIP capital gains calculation is not straightforward. The contributions are monthly, and every installment matters.
The First-In-First-Out rule is followed for redeeming units.
Thus, if you have been investing ₹10,000 every month, and the first month your purchase was 980 units, and in the next month 960 units, the third month 930 units, and so on, then a sale of 1,200 units would consist of 980 units from the first month and 220 units from the second month.
Basically, you cannot take advantage of averaging.
A detailed report is prepared and sent by the mutual fund institution that shows how many units are held, and from which month. Your redemption will, therefore, comprise partly LTCG and partly STCG if you redeem it after 2-4 years.
However, there is no need for you to bother yourself. Your accountant will have the necessary software to crunch the capital gains amount.
Beware…
Mutual fund investments, especially SIP, are attractive. But a falling rupee adds to worry. In 2013, a dollar bought 56 rupees. Now, it buys 74—a drop of 33% in 7 years (as of September 2020).
Your repatriation must match the depreciation. If you repatriate when the rupee is weak, you lose. On the other hand, you also gain, because the $1,000 you invested in SIP in 2013 is now worth 33% more.
The overall matrix can get really complex, especially if the rupee is falling and the stock market is in a bear grip.
Repatriation in such periods must be hedged to protect you against a downside, if possible. It is possible to do so easily with the help of an expert financial advisor.
