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Ramalingam Kalirajan  |6986 Answers  |Ask -

Mutual Funds, Financial Planning Expert - Answered on Jul 08, 2024

Ramalingam Kalirajan has over 23 years of experience in mutual funds and financial planning.
He has an MBA in finance from the University of Madras and is a certified financial planner.
He is the director and chief financial planner at Holistic Investment, a Chennai-based firm that offers financial planning and wealth management advice.... more
Vishal Question by Vishal on Jul 08, 2024Hindi
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I am currently residing in UAE. Can I use the money from NRE account to invest in mutual funds? If so, please guide me how to do so. I usually remit INR 20k every month, which I would like to invest for long term, more than 10 years.

Ans: It's fantastic that you're thinking about long-term investments. Investing in mutual funds from the UAE using your NRE account is definitely possible. Let's go through the process and consider the best ways to achieve your goals.

Understanding NRE Accounts and Mutual Funds
NRE Account Benefits:

Non-Resident External (NRE) accounts allow NRIs to park their foreign earnings in India.
Funds in NRE accounts are fully repatriable, tax-free, and can be converted to INR.
Mutual Funds for NRIs:

NRIs can invest in Indian mutual funds through their NRE accounts.
Investing in mutual funds provides diversification, professional management, and potential for higher returns.
Steps to Invest in Mutual Funds from UAE
1. Contact a Certified Financial Planner (CFP):

A CFP will guide you through the investment process.
They can help you understand the best options available for your goals.
2. Complete KYC Compliance:

Your CFP will help you with the Know Your Customer (KYC) process.
Submit identity proof, address proof, and a recent photograph.
Documents need to be notarized or attested by the Indian Embassy if required.
3. Choose the Right Fund House:

Select a fund house that allows NRI investments.
Many reputed fund houses cater to NRIs.
4. Open an Account:

Your CFP will assist in opening an NRI mutual fund account with the selected fund house.
This can usually be done online through the fund house’s website.
5. Mode of Investment:

You can invest through SIP (Systematic Investment Plan) or lump-sum.
SIPs are recommended for long-term investments as they provide the benefit of rupee cost averaging.
6. Fund Transfer:

Transfer funds from your NRE account to the mutual fund account.
Ensure compliance with FEMA (Foreign Exchange Management Act) guidelines.
Investment Strategy for Long-term Growth
1. Diversify Your Portfolio:

Invest in a mix of equity and debt funds.
Equity funds for growth and debt funds for stability.
2. Equity Mutual Funds:

Suitable for long-term growth.
Include large-cap, mid-cap, and small-cap funds for diversification.
High-risk but potential for high returns.
3. Debt Mutual Funds:

Provide stability and regular income.
Less volatile compared to equity funds.
Include short-term, medium-term, and long-term debt funds.
4. Balanced/Hybrid Funds:

Mix of equity and debt.
Lower risk compared to pure equity funds.
Good for moderate risk-takers.
Advantages of Mutual Fund Investments
1. Professional Management:

Funds managed by experienced fund managers.
They make investment decisions based on market research and analysis.
2. Diversification:

Spreads risk across different securities.
Reduces impact of poor performance of a single security.
3. Liquidity:

Easy to buy and sell mutual fund units.
Funds can be redeemed anytime, subject to exit loads.
4. Tax Efficiency:

Long-term capital gains tax is lower.
No tax on dividends for NRE account holders.
Power of Compounding
1. Long-term Growth:

Investing for more than 10 years allows your money to grow exponentially.
Reinvested earnings generate additional earnings over time.
2. SIP Benefits:

Regular investments benefit from compounding.
Disciplined approach helps in building a substantial corpus over time.
Risk Management
1. Understand Risks:

Equity funds are subject to market risks.
Debt funds have interest rate and credit risks.
2. Risk Appetite:

Choose funds based on your risk tolerance.
Diversify across different fund categories to balance risk.
Regular Monitoring and Review
1. Periodic Review:

Review your portfolio regularly.
Make adjustments based on performance and changing financial goals.
2. Stay Updated:

Keep track of market trends and fund performance.
Stay informed about any changes in mutual fund regulations.
Tax Implications for NRIs
1. Tax on Capital Gains:

Short-term capital gains on equity funds taxed at 15%.
Long-term capital gains on equity funds above Rs. 1 lakh taxed at 10%.
Debt funds have different tax treatment.
2. Double Taxation Avoidance Agreement (DTAA):

Check if there's a DTAA between India and UAE.
This helps avoid being taxed twice on the same income.
Final Insights
Investing Rs. 20,000 every month from your NRE account into mutual funds is a wise decision. It leverages the power of compounding and professional management. By diversifying your portfolio, balancing between equity and debt funds, and maintaining regular investments, you can achieve significant long-term growth.

Stay disciplined, monitor your investments, and adjust your strategy as needed. Your consistent efforts will help you build a robust financial future.

Best Regards,

K. Ramalingam, MBA, CFP

Chief Financial Planner

www.holisticinvestment.in
DISCLAIMER: The content of this post by the expert is the personal view of the rediffGURU. Users are advised to pursue the information provided by the rediffGURU only as a source of information to be as a point of reference and to rely on their own judgement when making a decision.
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Ramalingam Kalirajan  |6986 Answers  |Ask -

Mutual Funds, Financial Planning Expert - Answered on Jul 03, 2024

Asked by Anonymous - Jul 03, 2024Hindi
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Hi Sir, I am a Non-Resident Indian with 10 lakhs in my NRE account. Currently, I do not need this money for six months. I am hesitant to put this money into Fixed Deposits or Savings accounts. Would it be advisable to invest in Mutual Funds? Alternatively, could you please suggest a safe investment option other than Fixed Deposits and Savings accounts?
Ans: It’s great that you have Rs. 10 lakhs in your NRE account. Having this liquidity gives you a lot of flexibility. Let’s explore your options to grow this money effectively while balancing safety and potential returns.

Understanding Your Situation
You mentioned you do not need this money for six months. That gives you a short-term investment horizon. We need to consider both safety and potential returns.

Mutual Funds: A Balanced Approach
Mutual funds can be an excellent option. They offer diversification, which spreads risk across various assets. Since you are looking for a short-term investment, we should focus on categories suited for shorter horizons.

Types of Mutual Funds for Short-Term Investment
Liquid Funds:

These are ideal for short-term investments. They invest in very short-term debt instruments. They offer higher returns than savings accounts and are relatively low risk.

Ultra-Short Duration Funds:

These funds invest in debt instruments with slightly longer maturities than liquid funds. They offer a balance between safety and returns.

Short-Term Debt Funds:

If you can extend your investment horizon slightly beyond six months, short-term debt funds are worth considering. They invest in debt instruments with maturities of one to three years.
Arbitrage Funds:

These funds exploit price differences in different markets. They are relatively safe and provide returns comparable to short-term debt funds.

Money Market Funds:

These invest in short-term instruments like treasury bills, commercial paper, and certificates of deposit. They are low-risk and suitable for short-term investments.
Advantages of Mutual Funds
Diversification:

Your investment is spread across multiple securities, reducing risk.

Professional Management:

Fund managers make informed decisions based on market research and analysis.

Liquidity:

You can easily redeem your investments without significant penalties.

Flexibility:

You can choose funds based on your risk appetite and investment horizon.

Risks to Consider
Market Risk:

Even though short-term debt funds are relatively stable, they are not entirely risk-free.

Interest Rate Risk:

Changes in interest rates can affect the returns of debt funds.

Regular vs. Direct Funds
Investing through a Certified Financial Planner (CFP) can be beneficial. Regular funds through an MFD with CFP credentials provide professional guidance. Direct funds might seem cost-effective, but the lack of expert advice can lead to suboptimal decisions.

I appreciate your cautious approach. It's wise to consider alternatives to traditional fixed deposits. Your decision to explore mutual funds shows your willingness to grow your wealth while managing risk. It’s also great that you’re seeking advice to make informed choices.

Final Insights
Investing Rs. 10 lakhs for six months requires a balanced approach. Mutual funds, especially liquid and ultra-short duration funds, offer a good mix of safety and returns. They provide diversification, professional management, and liquidity. If you prefer not to invest in mutual funds, treasury bills and money market funds are safe alternatives.

Always consider your risk tolerance and investment horizon. Consulting a Certified Financial Planner can help tailor investments to your needs. They can provide valuable insights and help you navigate the investment landscape effectively.

Best Regards,

K. Ramalingam, MBA, CFP,

Chief Financial Planner,

www.holisticinvestment.in

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If in the past you have had the urge to QUIT, how is this time going to be different? This is not to discourage you from taking up 'new work' but pointing out that there is some amount of work that you need to put to clear the mind out of blockages.
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DISCLAIMER: The content of this post by the expert is the personal view of the rediffGURU. Investment in securities market are subject to market risks. Read all the related document carefully before investing. The securities quoted are for illustration only and are not recommendatory. Users are advised to pursue the information provided by the rediffGURU only as a source of information and as a point of reference and to rely on their own judgement when making a decision. RediffGURUS is an intermediary as per India's Information Technology Act.

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