NRI Investment in Mutual Funds

Introduction

• Direct investment in Indian mutual funds is preferred over investment in India dedicated Exchange Traded Funds (ETFs) available in the US because of diversification benefits. India dedicated ETFs generally have concentrated portfolios with limited investment options (US ADRs)
• Past performance of Indian mutual funds has been better than that of India dedicated ETFs
• Investing in Indian mutual funds is tax efficient because of tax free dividend income and zero long term capital gain tax

Limitations in India Dedicated ETFs

Diversification	India dedicated ETFs invest primarily in ADRs or GDRs, of Indian companies. Since the number of Indian companies with these GDR and ADR offerings are limited, ADR (12 Indian companies) and GDR (<> Therefore, the portfolio lacks diversification and tends to be concentrated with a limited basket of stocks
Dividend Reinvestment Option	Indian mutual funds generally provide an option for dividend to be reinvested in the fund without charging any entry load unlike India dedicated ETFs where dividends declared are not allowed to be reinvested directly
Units Allotted	Investors can hold units up to four decimal places (i.e. fraction of shares) in case of Indian mutual funds unlike India dedicated ETFs where these are sold in whole shares.

Performance of India Dedicated ETFs Compared with Indian Mutual Funds

Indian diversified equity mutual funds have performed much better than the India dedicated ETFs in the U.S.

Certain Indian mutual funds have not only out performed India dedicated ETFs but also the BSE Sensex

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