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The share of non-resident Indians (NRIs) and foreign investors in Indian mutual funds has declined over time despite an increase of Rs 5,000 crore over the past five years.
Mutual fund holdings in the sector rose to Rs 1.54 trillion in December 2022 from Rs 0.95 trillion in December 2018, showing a business-standard analysis of the data by the Association of Mutual Funds in India (Amfi). Their share of total mutual fund assets fell from 4.2% to 3.9% over the same period.
Nasdaq Composite Index was 17% between December 2019 and December 2022. Many technology stocks rose sharply. The MSCI US index is up 18% over the same period. As of December 2022, the Indian rupee depreciated to Rs 82.7 against the US dollar from Rs 71.4 in December 2019. A devalued currency lowers returns for overseas investors.
The number of investor accounts in mutual funds has increased from about 80-90 million in 2018 and 2019 before the pandemic to more than 140 million in December 2022. Total assets under management rose from Rs 23 trillion to Rs 40 trillion over the same period.
Several headwinds may have affected the ability of overseas investors to participate during this period.
Non-resident Indian investments are subject to the Foreign Account Tax Compliance Act (FATCA). This places onerous compliance requirements on any institution accepting capital from US citizens or residents. They must notify the US tax authorities of any potential problems. This rule applies to both personal and non-personal.
“The impact of FATCA is not only related to investor ‘onboarding’, but the entire life cycle of an investment account or portfolio. Any event that affects a client’s tax status or changes in key information may trigger an impact under FATCA. In addition, FATCA due diligence will be directed at each investor, including co-investors,” according to Amfi’s legal note.
It is said that some mutual fund companies need to invest in offline mode to make it safer. Others have chosen not to accept funds from US investors in the first place to avoid compliance-related burdens.
