NRIs today have access to almost every investment avenue available to resident Indians – from direct equity to managed portfolios and private equity. Each investment option, however, carries its own set of rules, benefits, and risk profiles. It is therefore important for NRIs to understand these nuances before deciding where to invest. Let’s explore the various investment options available for NRIs, focusing particularly on equity and equity-related tools.
Understanding equity investments
Investment in ownership interest or the risk capital in any organization is considered as an equity investment. Equity investment is risky and the return is unpredictable, unstable, and can also be negative (loss). An equity investor buys and holds the shares of stock in a company in anticipation of dividends and/or capital gains. As equity investing is risky, return on equity is typically higher than debt to compensate for this higher risk over a long-term period.
Investing in direct shares of companies in the stock market, indirect investment through equity mutual funds, investing in an equity-based Portfolio Management Service (PMS) or Alternative Investment Fund (AIF) or investing in unlisted stocks, start-up companies as an angel, private equity or venture capital investor are all examples of equity investments. For directly investing in equity, an investor should have sufficient knowledge of the company, its business, and the effect of other factors on the company’s profitability or price. Else, it is advisable to invest indirectly in equity through Equity Mutual Funds.
Portfolio Investment Scheme (PIS)
The PIS is a facility notified by RBI to accommodate buying and selling of Indian equities by non-resident Indians (NRIs) and Overseas Citizens of India (OCI) on repatriation basis (i.e. from NRE, FCNR or inward remittance). For non-repatriation basis, an NRI or an OCI is allowed to invest in Indian equities directly from the NRO account without going through the PIS route. Under PIS, an NRI or OCI can invest directly in equity shares of listed Indian companies, in recognized stock exchanges, on delivery basis, through a designated Authorized Dealer, and up to a ceiling prescribed by RBI for that company.
Depository Participant (DP)
In India, there are only two depositories – National Securities Depository Ltd. (NSDL) and Central Depository Service Ltd. (CDSL), which facilitates transactions in the securities. A “Depository Participant” (DP) is an agent of the depository who is authorized to offer depository services, such as dematerialization or rematerialization, transfer of securities and settlement of trades to investors. A bank can also be a DP provided it is an agent of CDSL or NSDL. RBI has specified the ceiling up to which the NRI investment is allowed for each company and monitors the investments in equity shares by NRIs and OCIs. Once the aggregate investment reaches the cut-off point, further purchases require RBI approval. Sale orders have no restriction. Equity investment generates dividend income and capital gains, taxed as per slab rates.
Equity Mutual Fund
Mutual Fund is an investment tool that pools the money from thousands of investors and invests in various securities as per the scheme objective and is managed by the professionals. Equity Mutual funds invest in equity shares and related instruments of various companies so the risk and return will be close to investing in the equity market while diversifying the investments. Various equity funds are available based on Market capitalization, sectors and industries, investment style, etc. Equity mutual funds are a good option to invest in equity on a risk adjusted basis.
Portfolio Management Service (PMS)
Portfolio Management Services is a mutual fund for special clients with a twist. Like mutual funds, the portfolio is managed by a professional money manager to meet specified investment objectives. However, unlike mutual funds, the investor does not own a unit but owns individual securities in his / her name. PMS is regulated by SEBI, which has mandated a minimum investment amount of Rs 50 lakhs. The PMS usually have an entry load, fund management charges (1-2%) and profit sharing (e.g. 20% above 10%). PMS may also charge Custodian fees, Demat account charges, brokerage and accounting / audit charges. Income from PMS is taxed as per nature of income or business/profession.
Specialized Investment Fund (SIF)
As there is a big gap between minimum investment in Mutual Fund (MF) of Rs. 100 and Portfolio Management Service (PMS) is 50,00,000, SEBI has introduced Specialized Investment Fund (SIF) with minimum investment amount of Rs. 10,00,000. SIF may also open systematic options like Systematic Investment Plan (SIP), Systematic Withdrawal Plan (SWP) and Systematic Transfer Plan (STP) provided minimum investment criteria of 10 lakhs is met. SIFs can be open-ended, close-ended, or interval-based investment strategies. SIF is regulated by SEBI and minimum investment of Rs 10 lakh per investor must be maintained across all investment strategies at the PAN level. SIFs may have a dual fee structure of 1-2% management fees plus 10-20% performance-based fees. Income from SIF would be in the nature of dividend or capital gain, taxed as per slab rates or applicable capital gain tax rates.
Alternative Investment Fund (AIF)
AIF refers to any fund established or incorporated in India which is a privately pooled investment vehicle which collects funds from sophisticated investors, whether Indian or foreign, for investing it in accordance with a defined investment policy for the benefit of its investors. AIF is regulated by SEBI (Alternative Investment Funds) Regulations, 2012 and needs to be registered in one of the following three categories:
- Category I AIF, which invests in start-up or early stage ventures, social ventures, SMEs, or other sectors considered socially or economically desirable.
- Category II AIF, which is not covered by category I and III, and do not take any leverage or borrowing for investments.
- Category III AIF, which employs diverse or complex trading strategies or take leverage or invest in derivatives.
AIF schemes under Category I & II shall be close ended for a minimum of three years. Category III may be open or close ended. AIF charges include account setup, fund management, and profit sharing. Income belongs to the investor and can be interest, dividend, capital gain, or profit, with tax pass-through applicable.
Private Equity and Venture Capital
Private Equity is the capital invested in a company that is not publicly listed whereas Venture Capital is the funding given to the startups that show potential for long term growth. The key difference is private equity investor invests in the companies which are already established and matured and venture capital investor invest in new ventures or startups. For equity investments in private equity or venture capital, there are ceiling limits placed by the RBI beyond which NRIs/OCIs, and other foreign investors, cannot invest. Investing in PE or VC is highly risky and the investment required is large, so it is only for High Net Worth Individuals (HNIs). Income from PE/VC can be interest, dividend, capital gain or share of profit. Interest and dividends are taxed as per slab rates. Share of profit from LLP or Partnership firm after the firm has paid income tax is tax free for the investor.
Investing in India offers NRIs diverse opportunities across equity, mutual funds, PMS, AIFs, private equity, and venture capital. Each option carries unique features, risks, and regulatory requirements, making informed decision-making critical. ExpertNRI, as trusted NRI investment in India consultants, can guide investors in aligning their financial goals with suitable investment avenues while ensuring compliance with FDI, PIS, and SEBI regulations. With professional advice and strategic planning, NRIs can optimize returns, manage risks effectively, and participate in India’s growth story confidently. Partnering with ExpertNRI ensures a structured, risk-aware, and rewarding investment journey in India.
