Many NRIs find it essential to maintain exposure to the Indian financial markets. Whether they intend to return or have financially dependent family there, investments in India allow them to diversify their portfolio as well as support current or future rupee-denominated expenses. However, there are a couple of ways that NRIs can access the Indian markets. Below, we walk through the traditional way NRIs can invest in the Indian markets, before presenting a simpler, more efficient alternative.
NRI Accounts in India
Historically, NRIs had to remit money to India to access the markets. Funds would be transferred or wired from a foreign account to India, incurring transaction and foreign exchange charges. These funds would then be deposited into an NRE or NRO account, both of which are eligible to receive funds from outside India. NRE (non-resident external) and NRO (non-resident ordinary) accounts are two different means by which NRIs can maintain funds in India.
An NRE account is a bank account that can be individually or jointly held by up to two NRIs, in order to transfer foreign earnings to India. AN NRE account is tax-exempt in India, with no tax on the balance or any interest earned on the account. These accounts may be subject to exchange rate risk, as deposits to these accounts can only be made in foreign currency, while withdrawals are solely permitted in Indian rupees. Importantly, the principal and interest can be fully repatriated back to the foreign country, should the NRI have the need for the funds in their adopted country or decide not to repatriate.
AN NRO account is a bank account that can be jointly held by one or more NRIs or Indian citizens. Unlike the NRE account, deposits to NRO accounts can be made in rupees or foreign currency. Though both NRE and NRO accounts can receive income from outside India, NRO accounts are the only ones eligible to receive funds from income generated within India. Like the NRE account, the principal in NRO accounts can be maintained tax-free; however, interest income is taxable at 30%. NRO funds are also available for repatriation to the US or Canada, although subject to an annual $1MM limit.
Eligible Investments for NRIs
Many NRIs invest available NRE/NRO funds in Fixed Deposits, which provide investors a higher return than a savings account. Fixed deposit maturities range from 7 days to 10 years and are eligible for withdrawal only on maturity, with a penalty and/or reduced interest rates for early withdrawal. Rates on Fixed Deposits in India range from 7.5 to 8.0% for 1 to 5-year maturities, making them look relatively more attractive than the comparable 1.5% to 2.5% available for similarly structured Certificates of Deposit in the US. This difference in interest rates between the US and India is purely due to inflation, given India has significantly higher expected inflation than the US. When considered in real terms, both instruments have similar returns, making Fixed Deposits slightly less attractive, given the onerous transfer, investment, and compliance requirements.
In addition to Fixed Deposits, NRIs can access the primary and secondary capital markets in India through the PIS, or the Portfolio Investment Scheme. Established by the Reserve Bank of India (RBI), this process allows NRIs to acquire shares of Indian companies through the Indian stock exchange. Aggregate NRI investment is limited to 10% of the paid-up capital of any company, with shareholder approval required to increase that limit to 24%. RBI maintains and monitors an active list of companies that have reached their respective NRI investment caps. Due to these restrictions, NRIs have directly invested an aggregate of $419mm, a small percent of the total India market.
Mutual fund investments in India are also accessible by NRIs based in Canada or the US, although on a limited basis. Many fund houses do not permit NRI investments due to the rigorous compliance requirements set forth by the Foreign Account Tax Compliance Act, or FATCA.
Despite these direct investment options, maintaining the investment caps and paperwork can be difficult for the average investor who wants a low-cost, hands-off way to invest in India. Besides, maintaining an NRI investment advisor familiar with both the Indian and US or Canadian regulatory and tax requirements can be difficult, leaving NRIs with missed investment opportunities or lower than expected returns.
India focused ETFs: An Efficient way to Invest in Indian Equities.
Opening and maintaining NRE and NRO accounts means onerous regulatory requirements and tedious paperwork for NRIs. Additionally, investment in Indian debt or equities requires separate documentation and accounts for trading.
A better option to access the Indian markets would be through US-listed India focused ETFs. ETFs are funds that invest in a portfolio of Indian stocks mirroring an underlying index, such as the Nifty 50. ETFs are a cost-effective way to gain exposure to a basket of Indian equities or debt, with a lower management and transaction fee structure. As highly liquid instruments, ETFs allow investors to quickly invest or divest in the India market without worrying about time lag in order processing or the burdensome paperwork requirements of maintaining an India-based account.
US-based India ETFs are issued by some of the largest and most highly regarded asset managers in the world, including BlackRock, Invesco, and WisdomTree Investments. The largest US-based India ETF, iShares MSCI India ETF, has $4.9bn in assets and average daily trade volume of 3.9mm shares.
Investment in India through US-based ETFs is advantageous and more efficient relative to direct investment in India.
Better diversification – Investing in index-based ETFs automatically provides diversification across sectors and companies, vs. direct investment in individual Indian companies.
Highly Liquid – with significant order flow, investors can quickly get in and out of positions, without the need to coordinate across geographies or time differences.
Low Fee Structure – as ETFs mirror an existing index, they are automatically rebalanced to reflect an index, requiring minimal portfolio management by the issuer and thereby, having a much lower cost structure.
Reduced Filing Requirements – Limiting paperwork requirements to only the US saves investors both time and money.
Tax-Management Strategies – By holding a portfolio of both US and India ETFs in one account, investors can more easily take advantage of tax-loss harvesting and other tax minimization strategies.
Most NRIs find it important to have some exposure to the Indian equity or debt market, whether they have family, they are supporting or intend to return to India at a future date. In the past, this required remitting funds to India and investing directly in the markets there, with the burden of coordination and paperwork. With US-based India ETFs, investors can gain India exposure while simultaneously benefitting from enhanced liquidity, low fees, reduced paperwork, and the potential for tax-minimization. US-based India ETFs truly is a more efficient way for NRIs to invest in India.