FATCA doesn’t prohibit NRIs

This article was first published on livemint.

I am an NRI and have been told that I can’t invest in mutual funds in India because of Foreign Account Tax Compliance Act (FATCA). Is that true? If yes, what is the next best option for me to invest in?

Ever since FATCA has been enforced, financial institutions outside the US have become increasingly reluctant to deal with US entities. This has also led many people to think that FATCA prohibits any transaction between US entities and non-US financial institutions. But FATCA does not prohibit NRIs from investing in MFs in India. Instead, it enforces a set of disclosures which fund houses need to make for any investments by US/Canada-based entities.

In the wake of FATCA, some Indian fund houses have decided to not take any investment from NRIs in the US/Canada, but some others, including L&T Mutual Fund, UTI Mutual Fund, and Sundaram Mutual Fund, freely allow investments to be made by US and Canada NRI investors.

Why should NRIs choose to invest in MFs of India? What are the benefits?

India is one of the fastest growing economies in the world with growth rates averaging over 7% in the last 5 years. Both the International Monetary Fund (IMF) and World Bank have projected India’s growth rate to be 7.3% and 7.5% in 2018 and 2019, respectively. The growing economy has resulted in a robust capital market. A spate of IPOs in recent times is a testimony to the booming stock market. According to a Morgan Stanley report, India’s total market capitalization of equities is expected to grow 2.5 times to $6.1 trillion by 2027. A massive growth in market capitalization should translate into high returns for equity investors.

India is also among the fastest growing consumer markets in the world. Discretionary spending is on the rise and will continue to grow in the coming years. The recent taxation reforms in India should also contribute to growth in spending on services and consumer durables. Companies in FMCG, durables, auto, and consumer finance sectors stand to benefit from this and should see their stocks grow.

This makes a strong case of investing in the Indian equity markets. Mutual funds bring access to professionally managed investment in the equity market. Good equity mutual funds in India have given over 20% annual returns over the last 20 years, outperforming the Sensex and Nifty indices. The growth potential coupled with a stellar past performance makes a strong case for NRIs to invest in mutual funds in India.