Mutual Funds: How big a gift are GIFT city funds to NRIs? MintGenie explores

NRIs who look for investing in India in financial instruments often have ambiguous questions and challenges to go through. The GIFT city route in a way has addressed many of these concerns while it comes with certain limitations.

Some AMCs have launched their Gift City funds and many are in the line. AMCs like HDFC, Birla, Mirae, Motilal Oswal, ITI etc have launched their equity-oriented Gift City funds.

For distributors and investment advisors, the basket of products suggested for NRIs gets rich by the addition of GIFT City funds.

The current concerns addressed by GIFT City funds

Return leakage through currency depreciation: GIFT City funds allow NRIs to invest in their respective foreign currency and withdraw the proceeds in the same currency. Until now the prime concern of most NRIs was the rupee depreciation against the dollar. The rupee has been constantly depreciating against the dollar which swallows some of the returns generated when invested and withdrawn in INR, and then converted to dollars.

When NRIs invest in the prevailing Indian mutual fund schemes the investment and withdrawal are in INR and the rupee depreciation against the dollar eats about 3% or a bit more of the returns annually. The opportunity to invest and withdraw in the respective foreign currency would stop the leakage of returns through currency (INR) depreciation.

Invest remotely from wherever you are: A large population of NRIs are in the US and Canada and as per regulations they can transact in Indian mutual funds only when they are in India.

So, whenever there is a good market opportunity to invest in mutual funds or whenever they are in need of withdrawal they cannot do unless they are in India during that particular time. But the Gift city funds allow all NRIs based out of any country including the US and Canada to invest or withdraw when they are away from India.

The big taxation confusion: When NRIs invest in Indian MF schemes the taxation confusion is a big mess. When NRIs invest in Indian MFs , TDS is deducted by default on the capital gains when redeemed. On top of this, the respective foreign country where the NRI lives also deducts taxes, based on the taxation rules there.

Particularly in the case of US NRIs apart from the TDS deducted in India, tax is deducted on the accrued notional income every year even before the redemption. This double deduction of taxes and the complication in tax reporting has been discouraging some of the NRIs to invest in Indian MFs.

On the other side in the case of the countries in the UAE and a few others do not levy Income Tax in their respective country. But when UAE based NRIs invest in Indian MFs, TDS is deducted here after which they will have to claim it by providing necessary proofs.

But Gift City funds are completely free from such TDS in India and NRIs can take home the complete proceeds without any deduction here. In the case of Cat III AIF structures under which the equity funds fall, the long-term and short-term capital gains tax are paid at the fund level on the shares sold and no other tax is deducted from the fund during redemption.

Apart from this, on fund management charges and other charges, GST will not be levied in the case of GIFT city funds, unlike the usual portfolio management schemes and AIFs.

Points to consider while investing in GIFT City funds

Currently, all GIFT City funds are in the AIF structure. Due to this the minimum ticket size for Gift City funds is 150000 USD which means allocation of a large sum to a single fund. As this is in the AIF route unlike regular PMS schemes which allow a mix of strategies in a single account (for a total of 50 lakhs investment), GIFT city funds allow exposure only to a single strategy with USD 150000.

So, only if an NRI has a financial portfolio of at least USD 1500000 it may be ideal to invest in a Gift city fund that is an allocation of 10%. Else this may lead to high concentration risk.

As most of the schemes or strategies of GIFT City funds are copies of their Indian schemes and strategies, NRIs who cannot afford allocation of USD 150000 to a single GIFT City fund can invest in those strategies and schemes available in the regular MFs and PMSs which take a minimum investment of ₹500 and ₹50,00,000 respectively, though with the restrictions applicable for NRIs.

For NRIs who can afford the kind of quantum of USD 150000 GIFT City funds mandate this is a big boon. For those who cannot afford, hopefully low-ticket variants will emerge in the future.

As these are early days of GIFT City funds we should perhaps see many innovative products and multiple kinds of variants evolving. The GIFT City is well poised to attract great NRI flows. Hope to see the regulators and manufacturers make the route as attractive and secular as possible which can also disrupt the remittance trajectory into the country.

V.Krishna Dassan, Director, Dhanavruksha Financial Services Pvt. Ltd.