NRI with 80 lakh in mutual funds needs to maximize investment and save on taxes

Ans: You and your wife have Rs. 80 lakh in mutual funds and Rs. 4-6 lakh in shares. These investments were SIPs and NFOs initiated when you were in India. Since moving abroad five years ago, you’ve stopped investing in India. You want to maximize your investments, save on taxes, and allow your earnings to grow, given that you don’t have an immediate need for the money.

Maximizing Your Investment Portfolio
Evaluate Your Current Portfolio: Begin by evaluating the performance of your mutual funds and shares. Analyze the returns and risk levels to see if they align with your long-term goals. A Certified Financial Planner (CFP) can assist in this analysis to ensure you remain on track.

Consider Rebalancing: If your portfolio is not diversified, rebalancing may be needed. This means adjusting the allocation between equity, debt, and other asset classes to match your risk appetite. Rebalancing can improve returns and reduce risk.

Switch from NFOs if Needed: If some of your funds are NFOs (New Fund Offers), consider switching to more established funds. NFOs may not always perform well compared to funds with a track record. Discuss this with your CFP to see if it makes sense.

Increase SIPs if Possible: Even though you’ve stopped investing, consider starting SIPs again if possible. Regular SIPs, even with smaller amounts, can lead to significant wealth accumulation over time.

Use Lump Sum Investments Wisely: If you have additional funds available, consider lump sum investments. However, it’s crucial to time these investments well. A phased approach, known as Systematic Transfer Plan (STP), can be considered to mitigate market volatility.

Include a Mix of Large, Mid, and Small-Cap Funds: Ensure your portfolio includes a mix of large-cap, mid-cap, and small-cap funds. This mix can provide stability and growth potential. Large-caps offer stability, while mid and small-caps can offer higher growth.

Consider Sectoral and Thematic Funds: If you’re willing to take a bit more risk, sectoral and thematic funds can be considered. These funds focus on specific sectors like technology, healthcare, etc. However, they come with higher risk, so they should be a small portion of your portfolio.

Stay Invested for Long-Term Growth: Since you don’t have an immediate need for the money, staying invested is a wise decision. Equity investments usually perform well over the long term. The power of compounding can significantly increase your wealth if you stay invested for an extended period.

Review Fund Performance Regularly: Regularly review your fund performance. If any fund consistently underperforms, consider switching to better-performing ones. Consulting with your CFP will help you make informed decisions.

Tax Considerations for Cashing Out
Understanding Tax Implications: When you decide to cash out, understand the tax implications. Long-term capital gains (LTCG) on equity mutual funds and shares are taxed at 12.5% if gains exceed Rs. 1.25 lakh in a financial year. For debt funds, the rate is as per your slab rate.

Utilize the Rs. 1.25 Lakh Exemption: If your gains are within Rs. 1.25 lakh in a financial year, you won’t pay any LTCG tax on equity funds. If you plan your withdrawals smartly, you can utilize this exemption every year.

Consider Partial Withdrawals: Instead of withdrawing a lump sum, consider partial withdrawals. This strategy can help you manage the tax burden effectively over several financial years.

Use Capital Gains for Reinvestment: If you cash out, reinvest your capital gains wisely. You could reinvest in mutual funds, PPF, or other tax-saving instruments. Discussing with a CFP can help you choose the best options.

Explore Tax-Efficient Investment Avenues: Invest in tax-efficient avenues like Equity Linked Savings Schemes (ELSS). Though ELSS has a lock-in period, it provides tax benefits under Section 80C, along with potential equity returns.

Consider NRI Taxation Rules: As NRIs, your global income is taxable in India if you qualify as a tax resident. However, specific exemptions and benefits are available under the Double Taxation Avoidance Agreement (DTAA) between India and your current country of residence. Consult with a tax expert familiar with NRI tax laws to optimize your tax outgo.

Plan for Double Taxation Avoidance: Utilize the benefits of the DTAA to avoid double taxation. Ensure that the income earned in India and your country of residence is taxed appropriately, considering the tax treaties in place.

Additional Considerations for NRIs
Repatriation of Funds: As NRIs, you may want to repatriate funds to your country of residence. Ensure compliance with the Foreign Exchange Management Act (FEMA) guidelines. The Reserve Bank of India (RBI) permits repatriation up to USD 1 million per financial year, including repatriation of sale proceeds of assets in India.

Continue Investing in Indian Markets: Even if you are abroad, continue investing in Indian markets if you can. Indian markets have historically provided robust returns, and staying invested can benefit your long-term financial goals.

NRO/NRE Account Utilization: Consider using NRO (Non-Resident Ordinary) or NRE (Non-Resident External) accounts for managing your Indian investments. These accounts help you manage income and investments in India efficiently, considering your NRI status.

Currency Exchange Considerations: Be mindful of currency exchange rates if you plan to repatriate funds. Currency fluctuations can impact your returns. A Certified Financial Planner can guide you on the best time to repatriate funds, considering exchange rates and tax implications.

Investment in Offshore Funds: If you wish to diversify further, consider investing in offshore mutual funds that invest in international markets. This will provide global exposure and reduce the concentration risk in Indian markets.

Final Insights
Long-Term Investment is Key: Your decision to stay invested without immediate cash-out needs is wise. Long-term investments in mutual funds and shares generally yield higher returns.

Regular Reviews: Ensure regular reviews of your investment portfolio. Rebalance when necessary to align with your financial goals.

Tax Efficiency: Focus on tax efficiency when planning to cash out. Utilize available exemptions and consult with experts familiar with NRI tax laws.

Consult with a Certified Financial Planner: To make the most informed decisions, regularly consult with a CFP who understands the nuances of NRI investments. They can provide a customized strategy based on your unique situation.

Stay Updated: Stay updated with the latest regulations and investment opportunities in India. Regular updates will help you make informed decisions.

Stay Diversified: Diversify your investments across different asset classes and geographical locations to reduce risk and enhance returns.

Start Investing Again: If feasible, restart your SIPs or consider lump sum investments. Continued investment will keep your portfolio growing.

Best Regards,

K. Ramalingam, MBA, CFP,

Chief Financial Planner,

www.holisticinvestment.in